nvr

An Intelligent Investor Discusses NVR (Examples of Clear Thinking and Analysis with 2000 10-K

Professor Greenblatt in his Columbia Graduate Business School class passes out several Value Investors Club write-ups by charlie479 as examples of clear, concise investment thinking. Diligent students may wish to go to the 2000 10-K of NVR included in the appendix (page 30) and value the company before reading these write-ups and discussions. Or just read the write-up and discussion to have an example of a professional investment thesis. The discussion is important to follow for understanding the thinking behind the idea. Additional write-ups by different authors are also included with their discussions.

You should be able to explain why this investment increased 5 to 6 times from the price of $143. What lessons can YOU apply to FUTURE investments?

www.valueinvestorsclub.com --

NVR, Inc. ( NVR ) - $143.00 Posted on 06/20/01 09:29 AM by charlie479

Description

NVR is a homebuilder. Their operating model, which is unique (and which is described later), allows them to assume the least risk in the industry and produce returns that are the largest.

Homebuilders are generally dismissed because they're cyclical and interest-rate sensitive (really, though, which industry isn't?) and downturns inevitably leave homebuilders holding large inventories of unsoldproperties -- the unlevered builders then suffer large inventory write-downs while the levered builders go into bankruptcy. However, NVR's model will prevent it from suffering the same fate and, indeed, NVR will prosper in a downturn at the expense of the weaker builders.

Two of the most important facets to its operating model are:

(1) NVR acquires control of land inventory through options contracts. These contracts give NVR the right to buy

www.csinvesting.wordpress.com studying/teaching and investing

Originally he bought at about $24 in 1997 for 35% of mother’s portfolio. VIC report on June 2001 at $143.

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finished lots from developers. NVR secures a supply of land for its homebuilding operations through the use of these options whereas other homebuilders purchase land outright and engage in land development. By avoiding that speculative practice of land purchase/development, and instead using options, NVR is able to control large blocks of land (years' worth) in its markets while employing less capital to do so. The lower capital requirements of this method translate into lower inventory risk and greater returns on capital.

(2) NVR pre-sells nearly all of its homes. Other homebuilders typically participate in some speculative construction. NVR does not. Before NVR begins construction, an order must be placed and a deposit made. This practice reduces risk and working capital requirements, which further enhance returns on capital.

In addition to NVR's superior model, consider the following:

-- Low valuation: NVR trades at a P/E of 8.6x trailing (7.1x 2001E EPS) and a TEV / EBITDA of 4.7x (trailing). TEV / (EBITDA - Capex) is 4.8x (trailing). TEV / FCF is 7.8x (trailing). I am defining FCF as Net income plus D&A minus Capex.

-- Backlog: NVR has a backlog of 5,765 ordered homes. These homes represent $1.49 billion of revenue. To put this into perspective, this is nearly three fiscal quarters of revenue. In addition, the homes in backlogcarry higher gross margins than the ones in the historical results. All of this should translate into higher EPS. (Management says 2001 EPS should be just under $20 per share. In the short history that the company hasprovided guidance (previously they refused to) they have consistently been ridiculously conservative. Their 1Q results and the backlog indicate to me that the $20 EPS estimate continues to be the case).

-- High ROIC: The low capex nature of its business ($301 mil LTM homebuilding EBITDA versus consolidated LTM Capex of $5 mil) and the low working capital requirements of its model allow NVR to produce superiorreturns on invested capital: 45.3% in 2000, and 5-year average ROIC of 25%. Bonus fact: In 2000, NVR sold $325 mil more homes than it did in 1999, yet inventory (the bulk of a homebuilder's working capital requirement) increased only $11 million.

-- Intelligent allocation of excess capital: High returns on capital and excess cash flows are only useful if you have a management that is smart about deploying it. In NVR's case, management has chosen thus far to deploy that capital to buy back its own stock. Between 12/31/93 and 12/31/00 the company reacquired 13.5 mil shares. In the first quarter of 2001, NVR purchased another 0.85 mil shares For perspective, there are only 8.1 mil primary shares out today (I'm using primary shares to illustrate this but I use diluted shares for enterprise value calculations).

-- Homes a basic necessity: People will always need homes to live in. The process of building a home has not changed materially in decades. Neither of these statements is likely to change in the next year, the next 5 years, or even the next 20 years. There is minimal technological or obsolescence risk.

-- Dominant in its markets: NVR competes in 18 geographic markets. It is the #1 player in 10 of them. As for the remaining 8, it is usually #2 or #3 (always at least in the top 5). The rest are markets that NVR has justrecently entered and will dominate with time.

-- Tax factors: The industry has indirectly enjoyed the benefits of a government subsidy in the form of tax deductible mortgage interest. Additionally, in the last few years, homebuyers no longer have to pay tax on the first $500k of capital gains on a home. This lowers the effective purchase price of a home for a consumer, increases the relative attractiveness of a home as an investment, and adds a little boost to demand for NVR's product.

NVR's profits and market dominance are all the more amazing when you remember that the results have been achieved without land development. NVR has margins better than its competitors despite the fact that otherhomebuilders benefit from the gross margin boost of speculative development in an inflationary environment.

Catalyst

The small number of shares outstanding occasionally creates large downward gaps. NVR's recent 25% drop is one such opportunity.

Also, share repurchases will continue to drive the stock. It's hard to overemphasize the magnitude of the repurchases or the wonderful track record of buybacks:




12/31/95: 15.21 (millions of shares outstanding)12/31/96: 13.5712/31/97: 11.0912/31/98: 10.3912/31/99: 9.1712/31/00: 8.8604/18/01: 8.14 END

Professor Greenblatt says, “To this day I hand out the first three write-ups he wrote on the Value Investors Club every year to my students at Columbia, to show them what a brilliant, concise, strightforward and clear investment thesis looks like. You can’t ask for more than what he wrote.”

Discussion

6 tim321 06/20/01 05:21 PMOption Model

NVR's option model relies heavily on the relationships that have been developed over the years with local developers in the markets it operates in. It is NOT a foregone conclusion that similar deals can be struck in the new markets that NVR chooses to enter (remember, they still derive a majority of their revenue from the D.C./Maryland area). This strategy may restrict growth to markets where such a strategy is viable (note however that they have entered 6 new markets over the past five years).NVR management recently showed a slide that detailed how through an investment of 96mm, they controlled 36,600 lots and produced $9.4 billion in revenue. While other homebuilders show negative operating cash flow during economic expansions (due to significant land reinvestment) NVR generates significant operating cash flow. As Charlie stated, even with softening, NVR’s write-downs would primarily be limited to forfeiture of option deposits (they would also try to be renegotiated to reflect prevailing economic conditions).

#Author Date Subject Private

charlie479 06/20/01 06:54 PM

Extension of the model to other

Tim, I think it will not be a piece of cake to apply NVR's operating model to new markets. For this reason, I doubt that NVR will ever be a nationwide builder. In some markets (California for example) there are too many eager, speculative builders who are willing to bear the risk of owning land. No land developer would sell an option on their land when they can just sell it outright to an eager-beaver builder who wants to speculate.

NVR does not need to expand into new markets in order for the stock to go up. In fact, I prefer that NVR stick to its markets where it can use the option model and reinvest the excess cash flow into stock buybacks rather than into operational expansion into new markets. So far, management has been very prudent about only expanding into markets where it can apply its model. It has not been tempted to use its massive cash flow to expand into areas where the economics are not as attractive.

Still, NVR will be able to find markets here and there to expand into:

One reason that NVR has been able to employ the options model is that it has long-standing relationships with developers who are willing to sell NVR options (these relationships represent another moat around its business, but that is a topic for another post). NVR has been able to leverage those relationships and extend into adjoining markets. Generally, these developers are in the same markets and will work with NVR under the same model in the new market.

The other reason that they have been able to use the options model is that they are usually the largest builder in the markets they are in. If you are a tiny local developer and NVR comes in and offers to buy options on your entire inventory, and is willing to begin a working relationship with you to potentially buy your future inventory, you'd consider going to the options model. It sure beats selling one property here and there to Joe's Homebuilding Shop or Bob's Homes R Us. As long as there are markets served primarily by small, private builders, NVR will be able to find new markets where it can apply its operating model. I remember reading a





statistic that less than 20% of all homes built in the US are built by the publicly-traded builders. If this is true, there are still markets that NVR can enter and be the big bully.

7 charlie479 06/20/01 05:31 PM lil

I am always on the lookout for reasons that NVR might deserve its low multiple. You have an interesting theory about the Street questioning their no-land model but I am not certain it's right.

NVR has options to buy enough land for 2 to 3 years' worth of sales so there is little danger that they will run out of plots. If you look at the "Contract land deposits" item on the balance sheet and make some estimates knowing that these options are roughly 5% of lot value, you can see that their effective land inventory is in line with management's statements about having 2 to 3 years of land.

As for your suggestion that the cost of options will be substantial in a downturn, I think the opposite will be true. In a deflationary environment, land developers will be more than happy to sell options cheaply -- they won't be worried about foregoing rising land prices. Just think about equity options: in a bull market, the call option prices on the S&P index tend to become more expensive than they are in a bear market.

Also, in a downturn, NVR will be able to walk away from its options while the other builders will suffer larger losses because they own the land outright.

Yes, all of these homebuilders are cheap on a P/E basis. Some of them deserve low P/Es -- many have leveraged themselves in order to buy land and speculate on development, and none of them (other than NVR) produce attractive returns on capital because of their operating model. So perhaps a sub 10 P/E is appropriate for the leveraged companies in the industry with 10% returns on equity.

However, NVR does not have these same drawbacks. It's leverage and ROEs are magnificent. Maintenance capex is almost zero. I am mystified that any company with these characteristics trades for less than a market multiple. I suspect that it is because 90% of all investors have (like you) said to themselves "oh, all of the stocks in this industry trade for a low multiple, it's not really that undervalued after all" without really thinking whether the financial characteristics of this specific company warrant a low multiple.

More broadly, I do not think it's relevant to look at industry multiples in evaluating a stock. I know that this is not what Investment Banking analyst programs having been teaching for years ("always look at the comps") but Buffet would retort: What Mr. Market is willing to pay for your business today has no impact on your business's intrinsic value. So why should Mr. Market's offer for your neighbor's business have any more impact on the intrinsic value of your company? Surely if Mr. Market started quoting Pepsi at 50% of its current value, you don't think it would alter the intrinsic value of Coca-Cola, do you?

5 lil305 06/20/01 04:07 PMOption model

I have been watching NVR as well- their RoC jumps out of most return on investment screens. In order to make an apples to apples comparison (since so many of these companies have a large amount of debt), I recently did an analysis of adjusted earnings (NIAT+ interest, tax adjusted) to EV for the 7 largest home builders (CTX, DHI, KBH, LEN, NVR, PHM, TOL). NVR is the cheapest stock by that measure among the group.

I confess that I don’t fully understand why NVR’s stock price trails the group – the lack of Wall St attention is too pat. I think that the market may be questioning their model, specifically, their lack of land inventory. The market may think that they will have trouble finding adequate building plots in the future at competitive prices or that in a downturn, the cost of the options on unused land will be substantial (a situation not faced for many years). I’d love to be educated more on this issue (I doubt that there is any problem applying their option model to new markets as suggested by tim321).

All of these stocks are cheap by normal measures - their operating margins and profits have gone up incredibly for the last 10 years – and the cycle shows no sign of turning given the lower interest rates. Today’s Lennar results have propelled the entire group so your recommendation looks timely. But, the relative P/E ratio of these companies has historically been around 60% of the market P/E. Notwithstanding the superior cash flow and share repurchase policy, I view NVR as a trading opportunity to be sold on any run ups – the market just





won’t apply a decent multiple. The market schizophrenia about the industry should result in continued volatility (buying and selling opportunities). All of that leads me to think that I can wait for the price to come down to 125 before jumping in.

4 charlie479 06/20/01 03:41 PMtim and cherb

Thanks for the feedback.

Tim, I agree that NVR gets little attention from Wall Street. I have owned this stock for 4 years and during that time, they have not held any earnings calls or even hired a public relations firm. Only a few months ago did they give their first ever public presentation to investors. A couple of other firms have picked up coverage recently in addition to UBS. CSFB and Legg Mason both do fine jobs. They have grown to become such a large and dominant homebuilder that the equity analysts can no longer ignore it, even though NVR will not generate any investment banking business for them.

I agree that any reasonable DCF produces a value north of $300. That is still only still only 15x P/E by the way, for a company with high ROICs and its 2001 EPS in contractual backlog.

3 charlie479 06/20/01 03:31 PMI forgot to add

NVR has a little mortgage banking business that I did not include in the valuation. I have excluded its contribution to EBITDA in my calculations (but I did not make any corresponding beneficial adjustment to enterprise value) for the sake of conservatism and also to illustrate what great cash flow the homebuilding operation produces just by itself.

If you liquidated the mortgage banking business and gave no credit to the ongoing stream of income that it produces, you would get approximately $3 per share.

There is no risky subprime lending going on in this division. It is strictly Fannie Mae type stuff that NVR immediately resells. And NVR no longer writes loans for any other builders.

2 tim321 06/20/01 02:25 PM Ditto

Charlie - Was just about to post on these guys. A few notes to add.

Besides an ROIC of 40+, NVR has shown a five year EPS growth rate of 70%. The company gets little attention from Wall Street (UBS Warburg is the only company that follows them) because management doesn't care much about street opinion (talked to other homebuilding analysts who once covered the stock) or I-banking business. Any conservative DCF model will get show NVR's intrinsic value at least in the 300 dollar range. As Charlie stated, the company has bought back 40% of the float since 95 and has outperformed all of its peers in almost every relevant category (I attribute this to what I believe is its competitive advantage - the risk here is that its CA isn't replicable in the other markets it enters). NVR was recently in the 200 dollar range but fell after some significant insider sales. Run any kind of shareholder return on NVR (5 year, 3 year, etc.) and NVR is always at least 2x its next closest competitor. There is a fundamental reason for this.

1 cherb405 06/20/01 01:41 PMGreat company

NVR is a great company.

# Author Date Subject Private

28 andrew109 09/27/01 02:10 PM charlie

Charlie -- I agree with you that homebuilding is not a "bad business" (as gopher suggested). However, I don't understand your reasoning for suggesting that CTX would be the homebuilder that you would short (assuming you were forced to choose one to short).

27 charlie479 09/19/01 11:37 AM gophar

>>Which companies in the space do you feel our most overvalued? - is there a paired trade opportunity that makes sense?




# Author Date Subject PrivateI generally discourage a paired trade in this industry. This is not because I disagree with your assessment that most of the companies in the sector are bad businesses, but because many of these companies already trade for extremely low P/Es. The potential downside of shorting something with a low P/E (even in a paired trade) can be massive.

That said, if you insist on shorting something as part of a pair, I'd do a simple screen and pick out the most leveraged lenders. These are the ones run by aggressive management who have been unable to resist accumulating inventory. Centex pops up at the top my screen.

26 gophar571 09/10/01 12:08 AMGreat company in a bad industry

Great Idea. I really like this company. Unfortunately, I am extremely bearish on real estate right now and can't get comfortable going naked long a homebuilder. Which companies in the space do you feel our most overvalued? - is there a paired trade opportunity that makes sense?

thanks.

25 charlie479 07/20/01 10:46 AMNVR, Inc. Announces a 60% Incr

NVR announced 2Q results today. Orders and backlog were up. Free cash flow improved and the company repurchased another 300k shares in the quarter.

Management now estimates EPS around $22.85 for 2001, which looks easily achievable given the average selling prices of the homes in backog.

24 charlie479 07/10/01 06:02 PMfollow up for elan

The example we were using was a little too simplified and ignored cost of capital. Therefore, the example produced a result that showed the developer was not being compensated for his cost of capital (or his development efforts) if he went down NVR's option path.

In reality, the developer would be compensated for cost of capital and their development efforts. For example, for a lot worth $100k in 2 years that NVR would pay a $5k deposit for today, a developer might be able to sell that same land now but they wouldn't get $100k for it. The sale price would be something lower -- with the difference being the profit that the developer gets in return for holding and developing the property over that time period.

This does not alter the conclusions of our previous example. Other builders will enjoy higher embedded gross profits per unit than NVR in a stable to rising environment but they will tie up more capital (and produce lower returns) to do so. Obviously, the other builders assume more risk and it shows up in the falling price environment. NVR will not have large amounts of capital tied up in a recession and its losses on inventory will be lower than the other builders. The other builders will likely be left with large amounts of debt while they try to liquidate excess land.

Despite this inherent gross profit disadvantage in the recent inflationary environment, NVR has in recent years been able to generate gross margins that compare favorably to other builders. I am repeating what I've already said in previous posts but I believe this is a result of their operational efficiency and dominant position in its markets.

23 stat820 06/29/01 01:00 PM Congrats

Well-deserved winner of the week.

22 elan19 06/26/01 12:21 PM KBH

From today's 6/26/01 conference call for homebuilder KB Home (which focuses on low end single family homes in the Western half of U.S.), I thought readers of this board would be interested in the following:

Out of KBH's current 73,000 lot positions, 26,000 are optioned, and management indicated (in response to a question on whether working capital requirements could be reduced) they hope to increase the percentage of




# Author Date Subject Privateoptioned lots, in markets where that can be done.

Anyone know if this is a goal of most of the traditional home builders?

21 charlie479 06/25/01 01:16 PMRumors of demise exaggerated

FYI. These are existing home sales but they are generally highly correlated with new home sales.

Existing-Home Sales Rise UnexpectedlyAs Housing Sector Remains Strong

A WALL STREET JOURNAL ONLINE News Roundup

Sales of existing single-family homes rose in May as the housing sector continued to show resilience to the sluggish economy.

See the report from the National Association of Realtors on existing-home sales in May.

Read analysis from Briefing.com on the home-sales report.

Existing-home sales rose 2.9% to a seasonally adjusted annual rate of 5.37 million in May from an upwardly revised pace of 5.22 million in April, the National Association of Realtors said Monday.

Economists surveyed by Thomson Global Markets had expected sales to be flat.

"With slightly higher mortgage interest rates in a slowing economy, some forecasters have been expecting a sales slowdown," said David Lereah, the association's chief economist. "However, demand is still very high, interest rates remain close to historic lows and many people are confident about their own economic future."

The national average rate for a 30-year, conventional fixed-rate mortgage was 7.34% in May, according to HSH Associates, a Butler, N.J., research firm.

The median price for an existing home was $145,500 in May, up 5.7% from May 2000 when the median price was $137,600.

Housing inventory levels at the end of May dropped 6.1% from April to a total of 1.53 million existing homes available for sale. However, the May inventory level is 2.7% higher than May 2000, when 1.49 million homes were on the market.

20 charlie479 06/24/01 06:34 PM elan

Management has said that options are typically 6% to 7% of land value. This is not quite as cheap as the 5% I used in my example, but I agree with you that it's still fairly cheap. I will try to confirm these prices again.

You raise a good follow-up question: if the options are so reasonably priced, why don't the other builders go in and bid on them? I have two theories on this: (1) The other builders still prefer outright land purchases instead of options because of the greater profit potential in an inflationary or rising environment. Therefore, competition for land is always intense, but not necessarily for options. (2) There are local oligopolies in the homebuilding industry. Builders need a certain thresh-hold level of construction and sales activity in an area to reach economies of scale for purchasing materials, showcasing model homes, having sales agents, etc. If there is a builder that already controls most of the land in a locality (years' worth, even), it is difficult for another builder to get enough inventory to support a critical level of sales. Therefore, even if there are an option here and there to acquire at cheap/reasonable prices, competition for them is limited to existing builders in the area with enough scale. Note that NVR is the largest builder in over half its markets, and is number 2 or 3 in almost all the rest.

Your question deserves a more thorough answer, so I will attempt to get management's opinion about why other builders don't compete vigorously for these options, and what motivates developers to sell options at such prices.




# Author Date Subject PrivateI agree that this could be one reason management does not like to communicate with the street. The other rumored reason is that NVR has been an eager acquirer of its stock and management is interested in increasing its stake relative to the public float at the cheapest price possible. I've never quite believed this (sounds too much like a conspiracy theory). I think the most likely answer is they just don't like the Street and prefer to focus on the operating the business than promoting the stock.

19 elan19 06/24/01 11:15 AMMore comments

Thanks for your detailed reply. A large cost you left out of your analysis is the cost of capital - assuming all land and options are acquired with borrowed money, RVN has to pay interest for the money borrowed to acquire the land. Using 8% simple interest for 2 years on the $95,000 difference between acquiring land out right for $100,000 at the beginning of the 2 years versus buying an option for $5000 at then exercising at the end of the 2 years, this results in extra interest costs for RVN of $15,200. So NVR comes out better in a scenario of rising land prices as well.

Using the example numbers you gave, I can't argue with your conclusion. Do landowners truly sell options for such foolishly cheap prices? If so, they are earning a negative return on their real estate investment when the interest costs to the landowner are factored in. This raises further questions for me:

Why are the options so cheap?

With such cheap options, why isn't there bidding from other large home builders? Acquiring an option at a higher price than you gave in your example is still a phenomenal deal for the homebuilder.

If the options are truly so inexpensive, then NVR is benefitting from a severe market inefficiency which I would imagine must in the long run become more efficient due to competition. If it takes 10 or 15 years for other homebuilders to catch on and start bidding against NVR, then that is 10 or 15 years NVR will continue to have such phenomenal performance.

Perhaps that is why NVR maintains such a low profile with investors - perhaps they are afraid that publicizing their success would attract other homebuilders to move into their markets using the same model. This would cause multiple bidders for land purchase options, causing them to become more rationally priced, and causing NVR's advantage versus other homebuilders to eventually disappear.

18 charlie479 06/24/01 10:39 AM elan

I understand your example but I think your conclusion is incorrect. I'll show that NVR's model actually produces *inferior* absolute profits versus the competition in a stable or inflationary environment (as a tradeoff for better returns on capital) but produces superior absolute profits versus other builders in a deflationary environment. Given that we have been in an inflationary environment for the last 7 years or so, it is all the more amazing that NVR has been able to produce profits consistent with operators which are using a riskier (but, in an inflationary environment, inherently more profitable) model.

Let me use an example with slightly different numbers than you did:

1. NVR buys a two year option on a piece of land with a current market value of $100k. The option costs $5k and entitles them to buy the land for $100k. (I believe these figures are closer to reality - it costs about 5% of land value for an at-the-money land option).

2. Homebuilder "RVN" buys the same piece of land for $100k.

Let's consider 3 scenarios: an environment of rising prices, stable prices and falling prices.

Rising prices. In one year, if the land price rises to $110k and NVR and RVN build a house on the land and sell it, RVN will have an embedded profit of $10k on the land whereas NVR will have an embedded profit of $5k. RVN and NVR will sell the house to the consumer at the same price, but RVN will realize a higher profit.

Stable prices. If the land price stays at $100k, the result is similar. RVN has no embedded profit, while NVR has an embedded loss of $5k. Again, RVN will realize a profit that is $5k higher than NVR's.

Falling prices. If the land price falls to $90k, RVN will have an embedded loss of $10k but NVR's loss will be limited to the $5k value of the option. NVR will simply not exercise its option and instead purchase the land at




# Author Date Subject Privatethe current market price of $90k. (NOTE: I think you incorrectly imply in your example that RVN is no worse off than NVR in this case because it can also purchase the land at the current market price of $90k and incur no loss. This is not correct. RVN has already purchased the land - it cannot purchase it twice. Even if RVN finds an identical property that it can buy for $90k, it does not eliminate the fact that it has an embedded loss of $10k on the first property).

There are two additional observations that can be drawn:

1. In a deflationary environment, buyers may not at all be interested in the specific property that NVR and RVN bought! Buyers may instead want a property in the next town, or something near the highway, or something in blue. NVR will be able to respond by walking away from their option on the property and then buying the lot in the next town near the highway with the color blue. RVN will be stuck. It will have to wait for a buyer to show up for its property, risking further price decreases in the meantime.

2. Theoretically, RVN could also try to buy the blue property in the next town to satisfy the buyer. However, RVN will likely face capital constraints when it looks in its piggy bank for funds to buy the second property. Remember, RVN has already incurred $100k of debt to buy the first piece of land that it holds in inventory. It's unlikely they'll be able to borrow another $90k. (RVN may have enough cash to do this the first dozen times, but multiply these figures by the thousands of lots that builders have in inventory to see why the debt amounts would be too large. Note that most builders currently have significant debt. NVR has almost zero net debt). NVR, meanwhile, has only incurred $5k of debt, so it has the financial flexibility to purchase the land.

17elan19 06/23/01 11:48 PM falling real

estate prices fol

Thanks for the response. To clarify my concern about declining sales in a protracted bear market for real estate with a specific example:

Let's say NVR pays $10,000 for an option to purchase a property for $100,000, which expires 2 years after the date the option contract is written. Assume this property is worth $95,0000 at the time the contract is written. Furthermore, assume that a bear market begins three months later, causing the underlying land value to decrease to $93000 at the end of year 1, and $90,000 at the end of year two.

NVR would have 2 choices:

1) NVR could let the option expire worthless, in which case they do not buy the land, they do not build a house on it, and they do not sell a house on this land. But they did incur an options expense, and there is no sale of a house on this land to offset the option expense.

2) NVR could exercise the option, buy the land, build the house, and sell it, at a price the market would bear. If this was done at the end of year two, they could profitably sell a house if they bought the land for $90,000 (+ the $10,000 option they already paid for) but if bought for $100,000, as required by the option contract, they would be incurring an additional $10,000 expense due to overpaying for the land. Other builders would be paying $90,000 for similar parcels and pricing their homes accordingly.

In case 1, there is no sale to offset the option expense. In case 2, the sale is far less profitable, and possibly a loss if the option strike price is too far above the market value of the land.

And all the while, they are still incurring 6% SG&A (The fact that most work is contracted out is very helpful as they at least will not have idle machinery). Obviously, they have a large portfolio of options with different expiration dates and terms. But assuming many of them expire worthless as in case 1, and there are no sales to offset the expense of the options, and the SG&A continues at the same levels, then I don't think it will be very good for NVR, to say the least.

A conventional homebuilder, on the other hand, does not have the problem of a huge portfolio of options expiring worthless. They can drastically slow down land purchases and continue to develop on existing properties at a slower pace.

I don't know how the numbers would work out for conventional landholding homebuilders vs. the NVR option model in this worst case scenario of declining real estate prices over a several year period. If real estate prices fall over a several year period, we know this hurts conventional home builders. Would this hurt NVR more or




# Author Date Subject Privateless than a conventional home builder? While I am convinced that NVR's model is superior in good times, mediocre times, and slightly bad times, I am not yet convinced that NVR's model would be superior during terrible times. Their model has yet to be tested in terrible times. Comments?

16 charlie479 06/23/01 05:15 PM mike

You make good observations.

> Developing lots is a highly politicized process, and incurably local in nature; the players will, IMO, never consolidate due to necessity of political connections to get local approvals.

I agree. The developers that supply the homebuilders are doomed to remain small and fragmented. Homebuilders, as they grow larger, will only gain leverage over them as the industry develops.

> In my experience, development takes place as much to assuage egos of developers as for profit, which is why so many of them go upside down in bad times (and even a few in good).

Yes. I think many of the public builders have not (and may never) be able to stick to the "options-only" model. It is too tempting for builders to purchase land and develop, especially in boom times. Management sees "can't lose" development opportunities and gradually succumbs. Note that inventories of these builders have swelled steadily as the boom 80s and 90s have continued.

15 charlie479 06/23/01 05:09 PM elan

>Options would expire over and over and over, racking up large expenses, possibly causing sales to fall more rapidly (and losses to mount more quickly) than a traditional home builder.

If there was a steady bear market in land prices, I agree that many options would go unexercised. However, I am not sure I agree with your characterization of these as "large expenses". For one, these losses should be less than the losses if they had purchased the land (I'm talking about absolute dollar losses, not percentage of original value). Secondly, the value invested in these options is not exceeding large relative to annual cash flow. Contract land deposits were approximately $111 mil at 3/31. If it takes 3 years for all of these to expire worthless, the company will have produced nearly $900 mil in EBITDA minus capex during that period. This is far from ruinous and likely to be much better than the performance of other operators in such an environment.

I'm not sure I'm clear on the point you are making in the second half of your sentence. Does the expiration of options have any impact on sales? Sales is a function of consumer demand.

FYI. NVR uses contractors for much of the actual homebuilding. And there is very little fixed PP&E involved -- a few model homes is all that is necessary. The only portion that I consider truly fixed is the SG&A, which is approximately 6% (and declining).

14 mike61 06/22/01 10:58 PM Options, developers, etc.

Great write-up and great discussion.

Options are used in CA, but not the dominant land transfer initiator (usually a sale w/a long due diligence period unless it’s for ready-to-build lots which can trade readily). I think this is a case where NVR has the better mouse trap and we'll see Centex, Pulte, etc. using more options in the next three to four years. Clearly better mgmt. of capital. As builders continue consolidation they will have more leverage against developers, and probably supply developer liquidity thru options @ early development stages (similar to miners and farmers selling their crops forward), and get better deals thru options.Developing lots is a highly politicized process, and incurably local in nature; the players will, IMO, never consolidate due to necessity of political connections to get local approvals. Builders are great consolidation candidates, as described in previous posts, and to take advantage of NVR's model.In my experience, development takes place as much to assuage egos of developers as for profit, which is why so many of them go upside down in bad times (and even a few in good). This is clearly an inappropriate activity for large builders; it’s a very different business. I expect publicly traded builders to do less development over time, again gravitating existing players more toward NVR's model.Assuming these observations are correct, Centex & others will get better @ managing capital and laying off land risk on local players, making the whole group a better set of businesses (much as FRE & FNM became




# Author Date Subject Privatebetter businesses as they learned to lay interest rate risk off on the markets).That leaves the perennially low multiple and recession as the main risk issues (assuming insider selling is considered elsewhere; nothing to add on that).The low multiple, I think, will slooowwwly improve as the sector business model improves & gets recognized. I think this is an area where the generals (the Street) are fighting the last war, and haven't figured out the structural shift in building as an industry. However, the street's mentality on Q'ly profit hasn't changed much in half a century, so the cyclicality (building can flat die due to buyer mentality from layoffs or high interest rates) will always keep a lid on multiples. 12x is probably the best PE we'll ever see, for the best company in the sector during a great year.Looks like a great company.

13 elan19 06/21/01 07:53 PMfalling house prices

I think this is a great idea and great write-up. One question I have is what would happen if house prices fell over a several year period in many or all of NVR's markets? Options would expire over and over and over, racking up large expenses, possibly causing sales to fall more rapidly (and losses to mount more quickly) than a traditional home builder. NVR must have fixed expenses (paid staff, machines, etc.) that would rise as a percentage of dropping sales.

Unlike many home builders, NVR's model has not yet been tested during a sustained recession, so perhaps its low multiple reflects that uncertainty.

But clearly, relative to technology growth companies, this company deserves a higher multiple - just the threat of recession sends tech company sales and earnings down, whereas it would take at least a pretty severe and protracted recession (producing falling land prices and house prices for several years in a row) to hurt NVR. It's mysterious to me that many tech companies which are demonstrating high susceptibility to even the slightest economic slowdown are still trading at much higher multiples than NVR, despite most of them having inferior business models even in good times.

12 charlie479 06/21/01 07:08 PM Andrew

Thank you for your post. You are obviously familiar with the industry.

#1 and #2 is true. Many other builders use options and they do try to keep speculative development low. However, all of the other builders at least dabble in land purchases and speculative development from time to time. Ultimately, this creates unnecessary risk and ties up valuable capital. I am still amazed that the other companies lack the discipline to apply the NVR model exclusively. Perhaps it is because most managements are focused on absolute dollar profits instead of returns on capital. Do you have any insights into why folks like CTX still employ operating models that tie up large amounts of capital in inventory?

#3 to #5 are all true and are all potential benefits to NVR that I did not mention. I hate saying this because it is so overused by Wall Street, but the industry is truly fragmented. All of the public builders account for a fraction of the total homes built in the U.S. (does somebody know this statistic I am referring to? I would hate to be quoting it incorrectly here). The small private builders lack the advantages that the larger builders have - access to lots, capital, economies of scale in purchasing, etc. And I believe there is room to create a large, recognized brand in this industry. For many customers, it is the single largest purchasing decision of their life when they buy a home. Customers are likely to feel safer making that purchase from a brand they recognize and trust.

11 charlie479 06/21/01 06:49 PM michael99

Yes, there has been some insider selling recently (well-timed ones at that. I noticed most were at or near the $200 high).

I am not terribly alarmed. These are the same folks that did a little selling at $20 and $40 and $100, etc. I suspect that these guys are not wealthy outside of their NVR holdings and it is simply a little cashing in rather than a vote about the prospects of the company. Management still has a meaningful stake (especially meaningful to them).

One last note about insider selling:

Some of Berkshire Hathaway's best purchases have been acquisitions of entire businesses for cash. In several of those cases, there was the ultimate form of insider selling -- they sold their entire stake in the business!




# Author Date Subject PrivateDespite this, Buffett still knew those companies were fundamentally great companies because he knows sellers are motivated by a whole slew of non-business related reasons.

10 andrew109 06/21/01 10:57 AMHomebuilders

Good Report. Hopefully my insights are useful...

1. Actually, most large homebuilders don't build on "spec" any more (other than a model home in each development).

2. Additionally, other large homebuilders frequently use land purchase options.

3. Large homebuilders are quickly gaining market share because bank financing has dried up for land purchases (large homebuilders have access to capital markets).

4. Large homebuilders are increasing margins by leveraging their size (placing orders for 20,000 dishwashers, etc.), using the internet to their advantage (marketing, scheduling, mortgage applications, bypassing real estate broker commissions, etc.). These are huge opportunities.

5. Housing starts might not be that much above normal, and new housing should be in short supply over the next few years.

6. I think Centex is very attractive here. Excellent management, very conservative accounting, good land position, and some other businesses with lots of potential (lawn care, pest control, wiring services, etc.).

7. Please see my recommendation on Ryder (R).

9 michael99 06/21/01 09:27 AMinsider selling

It's really a neat company - it comes up on screens regularly, and the financial press has interviewed analysts now and then that point to NVR's model The buybacks have been nothing short of amazing. And it could have been bought for 5 bucks back in 1994. The same model was in evidence back then! Now it's up 30X since then, 3X since 2000 started. Just the sheer amount of the run-up - could that be the reason insiders are selling and have never bought back a share as far as I can tell? This company just tricks one of my hot points: significant insider selling into a large buyback.

No doubt, NVH along with CMH are to me the two best companies in the homebuilding industry. But the market has in the past neglected these stocks during rougher times for the industry (even just 18 months ago, when NVH was at 43). Now, 9 years into a real estate boom with many analysts and Wall Street talking heads saying that real estate cyclicality has been repealed, it seems that we've had an overreaction. I'm not knocking NVH as a business.

This is a good healthy baby that is bound to be thrown out with the bathwater sometime. Right now, everyone's standing around, gawking and talking up the baby's prospects while the parents are sneaking out the back door.

Mike<123


48 charlie479 07/28/05 11:58 PM tim321

Yes it's been a crazy ride. Schar's discipline in sticking to the land-light model and returning excess cash to shareholders deserves much of the credit for the company's success. But so does a lot of luck and some of these Option ARM thingamajiggies that folks in the other threads are talking about. Also, Schar's way too greedy to make it to my favorite CEOs list. His mansion was paid for with wheelbarrows of liberally-issued




# Author Date Subject Privatestock options. NVR would have been a truly fantastic one if they had just kept their stock option appetite in check.

47 charlie479 02/11/03 03:38 PM tim321

The cash flow statement is indeed pretty good. There is almost no capex so all of the operating cash flow is available for share repurchases, which they have been eagerly doing.

Management indeed pays no attention to wall street coverage. It's a great thing.

I noticed your previous msg. I would send you an email but the address seems to be deleted from the post. It's probably better to post the question on VIC anyway.

46 tim321 02/11/03 11:03 AM 10-k

NVR's 10-K just released. One of the more amazing cash flow statements I have ever seen. Look at the amount of money going into share buybacks (362mm in 02 alone). One of the research analyst's told me a while back (kim from SSB) that the rumor on NVR was that they (management) were secretly trying to take the company private and that management paid no attention to Wall Street coverage.

45 tim321 12/02/02 08:59 PM question

Charlie - can you email me at xxxxxxI have a quick question for you. Thanks Tim.

44 charlie479 06/03/02 10:47 PM cfo

I have briefly met the cfo and ceo and I agree that they don't seem like the kind of guys who reward themselves with huge pay packages. They seem like down-to-earth straight-shooting. Nevertheless, there's no denying that they were party to these ridiculous stock option grants. So, whether they seem like it or not, they have a failure in corporate governance and executive compensation.

Thanks for the stock candidates. I will look when I get a chance. I honestly have not any good ideas since my NVR post (except my WNMLA post, which I like but is a different breed). I average maybe one every year or so but this year seems to be relative short on obvious things.

43 tim321 05/28/02 10:37 PM I

talked with the CFO (Paul Saville) a while back and he didnot seem like the kind of guy who would do this sort of thing. Very disappointing. Any new stock ideas?

P.S. - I have been researching Kookmin Bank, Regis, and Polaris. Some NVR like qualities here. Thanks Tim

42 charlie479 05/27/02 07:30 PM Options

The options grants for this company are excessive and the board's allowance of it is repulsive. This is the main negative of this stock.

The 10K has the correct issuance number in 2001. The exact number is not important. The bigger point to realize is that this company is reducing its stated earnings by a significant measure by issuing options every few years.

There isn't a lot of reassuring things I can say about the options program. It's essentially one of the costs of owning this otherwise very sound operation. I have drafted a letter to the board but have not gotten around to sending it. Perhaps several letters from VIC members will get them to change their long-term compensation policy.

41 mark227 04/14/02 07:17 PMOptions (continued)

exercise value of these options divided by the current stock price. If you still don't believe me, look at the proxy. You will see that Dwight Schar received 400,000 options, equal to 21.9% of the employee options issued in 2001. This implies employees received 1.826 MM options last year. Perhaps some of the other VIC members could help us resolve this issue and give their thoughts on the options grant.

40 mark227 04/14/02 07:09 PM Options

I believe that your numbers are incorrect. As I previously said, if you look at page 42 in the annual report, you




# Author Date Subject Privatewill see that last year 1,823,100 options were granted under the 2000 Option Plan and 106,000 were granted under the 1996 Option Plan. If you simply ADD UP all the options granted, exercisable and unexercisable of all the different plans as shown on the very next page, you will see that the number far exceeds the number that you mentioned. The number that you are referring to is the dilutive effect from exercisable options under the treasury stock method, which is calculated as the total number of exercisable options outstanding less the total

39 tim321 04/13/02 04:46 PM Price

Charlie - I haven't had a chance to update my model (back when the stock was trading at 140) that showed a very conservative value for NVR of at least 300 dollars a share. What are your risk/return thoughts now on NVR given the huger run up (this was the company I submitted for VIC membership). BTW - While it won't exhibit the same run-up as NVR, UST is another unique company that I believe will deliver investors a great return (see write-up). Thanks Tim

38 allen688 04/12/02 04:39 PM options

you have the 1.8 mil figure as options granted in '01, but that is how many were outstanding at 12/31/2001. they were issued over the past 9 years. and as far as recognizing them in their valuation, you indeed need to include them. the company reports 7,927,315 outstanding to calculate basic and 9,525,960 for diluted. the difference recognizes the options and forwards.

37 allen688 04/12/02 04:38 PM options

you have the 1.8 mil figure as options granted in '01, but that is how many were outstanding at 12/31/2001. they were issued over the past 9 years. and as far as recognizing them in their valuation, you indeed need to include them. the company reports 7,927,315 outstanding to calculate basic and 9,525,960 for diluted. the difference recognizes the options and forwards.

36 mark227 04/11/02 04:54 PM Options

I'm looking at page 42 in the annual report. I believe there were 1,823,100 options issued under the 2000 option plan and 106,000 issued under the 1996 plan in 2000. Where are you getting your numbers?

35 allen688 04/11/02 04:06 PMthere were 344,000 issued, not

I have a question though, what premium does this stock deserve to its peers? It’s at about 45% on '02 and '03 earnings to CTX.

34 mark227 04/11/02 02:43 PMOption grant

This has been a great pick and a great stock. However, according to the annual, 1.9 million options were granted last year, which seems a tad much given the company has only 7.5 million shares outstanding? Doesn't an option grant of this size (Black Scholes value $200 million) have to be figured into the value equation?

33 charlie479 02/03/02 06:41 PM tim321

I don't really have a target price. With $30 per share of earnings likely this year and high returns on capital that will continue because of its better operating model, I would not sell under $300. But this does not mean I would sell over $300 -- this is a company to own for a long time.

32 tim321 02/01/02 05:25 PMCurrent Price

Charlie - What is your exit price on this? While the price is closing in on my target price (high 200's) I really like the intangibles here (management, b-model etc.) that are hard to quantify. What is your take?

31 charlie479 01/14/02 01:34 PMAnother share repurchase

NVR authorized another share buyback last week. This one is for $300 mil, which is quite significant relative to the market capitalization.

30 andrew109 10/04/01 12:06 PM charlie

Thanks for your response on Centex. I agree that none of the homebuilders should be shorted. I disagree, however, that CTX is the most expensive homebuilder.




# Author Date Subject PrivateWith respect to the real estate development business, you should know that the real estate was acquired through bankruptcy (Vista) and that there is no tax basis on the land. Management is extremely smart (which would be another reason not to short CTX)and had other reasons (taxes, etc.)for this acquisition.

With respect to the financing business, the company in two years should earn $150MM-$165MM pre-tax on $300MM of capital.

Again, management is extremely smart and accounting is very conservative.

29 charlie479 10/03/01 11:30 PM andrew109

To be clear, I would not short any of the homebuilders. CTX benefits from the same advantages over the private builders that NVR does. And, it's hard to make a lot of money by shorting stocks with single digit P/Es.

If I would have to pick a few builders to short, though, CTX would be on my short list. The company has shown the behaviors that have gotten homebuilders into trouble. Centex has decided to get into the real estate development business. They've got such developments in their huge inventory balance and they even have a few real estate joint ventures. Additionally, they are increasing their financing operations.

I view both the financing business and the development business as capital intensive low-return businesses. In a serious down-turn, they will be stuck with unsalable developments and loans that could potentially deteriorate.

Look at CTX's returns on invested capital over the last 10 years. Also, note the increase in leverage. Sure signs of a mediocre business

END DISCUSSION---

NVR Inc. ( NVR ) - $586.00 SHORT IDEA Posted on 11/24/06 09:50 AM by msdonut940

Summary:

We are recommending a short sale of NVR. NVR is regional homebuilder levered to the D.C metropolitan area, with 40% of its production in this region. The company trades at 3.8x book value and 11x 2007E earnings. Charlie479 penned a prescient write-up of NVR in 2001. We suggest you read it as it includes some useful background information. We believe that Charlie479 was right because NVR’s business model is similar to a call option on the DC housing market, designed to generate excess performance in the up years. However, there is similar leverage to the downside. Despite this leveraged business model, the stock is only down 16%, year to date, in line with its peers. We believe the stock is worth half of where it is currently trading. Potential catalysts in the near term: additional write-downs, lower than expected 2007 earnings, and increased cancellations.

Detailed write-up

NVR is the eighth largest public homebuilder in the U.S by revenue. There are four different trade names under which NVR builds homes: Ryan Homes, NVHomes, Fox Ridge Homes and Rymarc homes. Ryan Homes, Fox Ridge Homes and Rymarc homes are moderately priced and marketed to first time homeowners and first-time move-up buyers. NVHomes is marketed primarily to move-up and upscale buyers. The company operates in 11 states, and 20 metropolitan areas. Its mix is as follows: 30% First-time buyer, 31% second time buyer, and 39% active adult/age restricted/second home.

The company segments its results into four regions: Washington, Baltimore, North and South. North is Delaware, Kentucky, Maryland Eastern Shore, Michigan, NJ, NY, Ohio and Pennsylvania. South is North Carolina, Tennessee and Richmond, VA. The company delivered about 15,000 homes in the last twelve months and had homebuilding revenues of approximately $6 bn.In unit terms, 38% of their deliveries, and 42% of their backlog is in the DC/Baltimore region. Because of higher average prices, DC/Baltimore represented over 50% of total revenues in 2005. The breakdown of deliveries in each area is as follows:




2004 2005 Q1 ’06 Q2 ’06 Q3 ’06 LTMSettlementsDC 3,523 3,663 745 1,074 869 3,781Baltimore 1,587 1,551 465 566 463 1,999North 5,211 5,744 1,138 1,801 1,692 6,486South 2,428 2,829 638 856 830 3,051Total 12,749 13,787 2,986 4,297 3,854 15,317Average price $332.24 $374.95 $395.90 $400.30 $396.30 $395.52

% of settlements in DC/Baltimore 40.1% 37.8% 40.5% 38.2% 34.6%

Cancellation RateDC 26.0% 21.0% 39.0%Baltimore 17.0% 14.0% 24.0%North 13.4% 9.6% 22.7%South 13.4% 9.6% 22.7%Total 17.0% 13.0% 27.0%

Backlog (units)DC 2,809 2,716 2,357Baltimore 1,066 960 764North 3,520 3,498 2,743South 1,562 1,690 1,524Total 8,957 8,864 7,388Average price $435.60 $428.50 $424.00

% of backlog in DC/Baltimore 43.3% 41.5% 42.2%While we could go into some detail with regards to industry specifics, we have no desire to waste everyone’s time given the bounty of better analysis with regards to whether the homebuilding industry is at a bottom, a top, or somewhere in the middle. For the purpose of this trade, the only thing that is important is that we do not return to a bull market next year, which even the most optimistic of homebuilder investors do not claim. In terms of real estate, the Washington DC metropolitan area has had extraordinary performance in the last five years. Average home price appreciation is 2.5x that the national average since 2001. As with any hot real estate area, speculators’ participation in the frenzy contributed to over-building on the part of homebuilders. Current inventory levels are over twice what they were last year, and are at the highest levels since 1998. As demand has stabilized, the only way for this inventory to decline is either for 1) prices to drop or 2) significant cuts in production. Both are currently being seen in the market and either scenario negatively impacts NVR’s 2007 earnings power. Some data points on the DC/Baltimore region:

Average median home price in Q3 ’06 was 420K Affordability: Washington ranked 161 out of 203 MSA’s; ironically Fort Myers, FL, the land of the million

dollar condo, ranked 160. Virginia – Sept ’06 vs. Sept ’05 building permits, down 37%. YTD permits are down 22%. Maryland – Sept ’06 vs. Sept ’05 building permits, down 11%, and down 19% YTD. Washington DC building permits are down 23% YTD. Existing Inventory in Metro DC of over 30,000 homes, twice what it was last year. In terms of months

of supply, we’ve seen figures stating about 6-10 months of supply depending upon the county. This number should increase as we enter into the slow selling season for DC area.




o Anecdotally, we’ve been told that the active-adult segment is performing worse than the market; apparently, the number of people who wish to live in a neighborhood without children is less than the supply that has recently entered the market.

When we first looked at NVR’s numbers in the second quarter of 2006, we were puzzled by a couple of discrepancies: 1) cancellations were not as high as we would have expected, 2) revenues are not off as much as their peers, and 3) gross margins were relatively high. All of these would speak to a better run company than average (and thus destroy our short thesis). We will take you through why each of these figures is in fact disguising a business that is currently falling off a cliff. First, cancellations have already started to rise vs. the second quarter. In Q3, NVR saw cancellations of 27% vs. 13% in Q2, giving credence to anecdotal comments that NVR had been aggressively discounting at close to prevent cancellations. Presumably, cancellations at NVR will show incremental declines going forwards, bringing them in line with industry performance; either that or gross margins will decrease significantly. Second, revenue growth and settlement (aka closing) growth has exceeded their peers due to a large increase in the number of communities open. In the third quarter, NVR had 609 communities open vs. 518 communities in the prior year, an increase of 18% yoy. An active increase in community count into a slowing market is risky. While it temporarily props up results, it also may make it more difficult for NVR to cut expenses as orders continue to slow. Third, gross margins are relatively high largely due to NVR’s mix – gross margins in the DC area average above 30%, well above that of the average homebuilder. We have been told that NVR is simply a better operator than its peers, but this is simply not true. Given Stanley Martin (a DC only builder) had gross margins of 30% in 2005 vs. 27% for NVR, one might argue that NVR’s margins should be even higher were it a better operator.

($ in thousands) 2004 2005 Q1 '06 Q2 '06 Q3 '06 LTMHomebuilding:

Revenues 4,247,503 5,177,7431,183,74

2 1,722,797 1,528,964 6,066,281Other income 2,655 6,301 2,376 2,634 3,238 10,392

Cost of sales(3,156,28

6)(3,738,03

0)(861,039

)(1,278,18

3)(1,157,87

1)(4,477,85

5)Impairment (26,000) (80,800) (106,800)

SG&A (260,795) (345,525)(114,006

) (119,551) (95,574) (431,380)Operating Income 833,077 1,100,489 211,073 301,697 197,957 1,060,638

Op Margin 19.6% 21.2% 17.8% 17.5% 12.9% 17.5%Op. margin ex.

Imp. 19.0% 18.2% 19.2%

Interest expense (11,934) (13,809) (5,527) (6,105) (3,141) (19,747)Homebuilding income 821,143 1,086,680 205,546 295,592 194,816 1,040,891Mortgage banking income 50,862 57,739 12,481 17,486 17,291 66,737Income before taxes 872,005 1,144,419 218,027 313,078 212,107 1,107,628Income tax expense (348,801) (446,860) (85,467) (122,726) (82,774)Tax rate 40.0% 39.0% 39.2% 39.2% 39.0%Net income 523,204 697,559 132,560 190,352 129,333

Revenue growth 18.0% 21.9% 26.0% 37.0% 13.2%Net income growth 24.6% 33.3% 12.4% 13.5% (31.7%)

Settlements (aka closings) 12,749 13,787 2,986 4,297 3,854 15,553New Orders 13,231 14,653 3,633 4,204 2,378 13,830Backlog 8,957 8,864 7,388New Orders/Settlements 103.8% 106.3% 121.7% 97.8% 61.7% 90.2%

NVR’s recent results show a disturbing trend. In addition to poorer margin performance and increasing write-downs over the past couple of quarters, the company’s new orders have fallen dramatically. Currently, they are receiving 0.6 orders for every house they close, despite the increase in community counts yoy. New Order




trends continue to weaken despite lower average prices. NVR commented in the last quarter that Washington DC prices were down 25% yoy while showing New Orders declines of 18% yoy. The company is clearly unable to replace their backlog. If current trends continue, next year production could fall down 10K homes, well below street expectations of approximately 12K homes delivered.

In addition, NVR’s unique business model leads to several questions. For those less familiar with the company, NVR exited bankruptcy in the early nineties. The management team switched NVR from the typical developer/builder model to a pure builder business model. Therefore, rather than take any land development risk, NVR does not take land onto the balance sheet until it has 1) a contract to sell the home and 2) the land is fully developed and ready to build. NVR is the only large homebuilder whose land strategy is 100% options-based. This model has led to greater asset turns, greater free cash flow generation, and greater returns on equity during the bull times. However, there are several disadvantages to this model as well, arguably the reason why the other homebuilders have chosen not to copy NVR. 1) The need to transfer development risk to a partner results in higher average prices paid/lot as well as higher option deposits at risk.

Therefore, barring large land or land development price increases, NVR should produce sub-par margins in comparison to their peers. 2) This is a difficult model to grow as it depends on the availability of partners. In some markets, there simply may not be developers willing to enter into these contracts. 3) As the number of builders in each market grows, it becomes more difficult for NVR to retain its market leading position, given these supply constraints, without signing irrational agreements. Given the rapid increase in option contracts signed in 2004 and 2005, it seems NVR started signing bad deals in an attempt to maintain share in its markets.

As we mentioned in our summary, we liken NVR’s business model to a call option on the metro DC/Baltimore housing markets. As you can see below, the correlation between gross margin increase and home price appreciation has been significant, with margins growing from 13% in 1994 to 28% in 2005. In comparison, Toll’s gross margins increased from 24% in 1994 to 32% in 2005. We believe the reason for this dramatic increase is NVR’s strategy of signing option contracts for finished lots. Option contracts are in essence a call option, with the strike price being the price/lot and the expiration date, being equivalent to the date the lots are purchased. The agreed price/lot is determined when the contract is signed, and a deposit is given to the land owners (aka, the price of purchasing a call option). The deposit is forfeit in the event the land is not purchased. Some price appreciation is built into the forward price/lot, generally in line with historical average land price growth of 5-10% per year, as well as some inflationary cost of 2-5% for development. The time frame for these options is dictated by the parties involved, but is generally around 3-5 years.

As a result, we believe NVR’s price per lot was dramatically below the market for two reasons: 1) Land prices increased on average 20% per year for the past five years and 2) Land development costs showed double digit growth for the past five years. We believe the second reason to be why NVR’s gross margin performance has exceeded their peers. As opposed to absorbing the increasing land developments costs, we believe the brunt of the unexpected cost was borne by their partners, who ended up selling finished lots to NVR at below market prices. Given land development can be up to 50% of the cost of a lot, this gave NVR a substantial cost benefit in comparison to peers – hence the relatively large increase in margins. NVR has controlled an average 6 years of supply since 2003. So it is possible that until recently, they were selling houses with finished lot prices set in the late nineties. However, like all FIFO inventory accounting systems, eventually inflation does start affecting a company’s margins. It’s just more delayed in the homebuilding sector than most industries.

yoy NVRHome Price Gross

(OFHEO) Margin1994 (0.9%) 12.8%1995 (0.4%) 13.6%1996 1.2% 13.4%1997 0.2% 13.7%1998 3.1% 15.3%1999 4.0% 17.1%2000 8.7% 19.1%2001 11.7% 21.8%2002 11.9% 23.7%




2003 10.4% 24.7%2004 19.6% 25.7%2005 24.6% 27.8%

Potential Write-down

With pricing declines and high inventory levels in much of the US, homebuilders are walking away from deals signed with bull market expectations. Those who were more aggressive in 2005 are facing larger write downs than those who were more conservative. NVR appears to be in the former category. From 2003 to 2005, lots controlled increased from 70,000 to 105,000 lots – an increase of 50% vs. an increase in closings of 14%. The company has $437.5 mm of option deposits on its balance sheet as of Q3 ’06, 19.4% of assets, and 40.4% of shareholder’s equity. Including deposits held by consolidated joint ventures and letters of credit outstanding of $17 mm, the total is $500.5 mm. (NVR is required to consolidate joint ventures where they are deemed to be the main beneficiary under FIN 46. Hence the cash they have on deposit is greater than the amount on their balance sheet.) In addition, in the 10-K, there is the following disclosure on page 63: “At December 31, 2005, assuming that contractual development milestones are met, NVR is committed to placing additional forfeitable deposits with land developers under existing lot option contracts of approximately $214 [mm]”. This number is not updated quarterly, so the current amount is unclear. If you include the $214 mm of additional deposits, there is a total of $714.5 mm in cash deposits at risk, over 70% of shareholder’s equity.

As mentioned earlier, we believe that most of these option contracts assume some average increase in land prices to determine the final purchase price/lot. Given the recent performance of 20% growth per year, it is likely that developers that signed contracts in 2004 and 2005 required more aggressive land price appreciation assumptions. Given current expectations are for land prices to decline, or to rise in the low single digits, many of these contracts have agreed purchase prices/lot well above market. And similar to any call option that is significantly out of the money, the current value is likely close to zero. Therefore, if NVR is unable to negotiate the purchase price down, all these contracts could be worthless. Assuming that all options struck since 2003 are worthless, there will be another $150 mm of write-downs expected. If you assume that at least 50% of the additional $214 mm of deposits that due is associated with worthless contracts that increases our expected write-downs to $257 mm. Given NVR trades at 3.8x book, an asset write-down of $257 mm could reduce the equity value by about $140/share, assuming that you keep the same egregious multiple of book.

Looking at potential asset write-downs in another manner, according to NVR’s 10-K, “The Company generally seeks to maintain control over a supply of lots believed to be suitable to meet its sales objectives for the next 24 to 36 months”. Given the current run rate of deliveries, NVR should have about 30,000 to 45,000 lots under control. As options are not without carry costs, it makes little sense to keep up a large supply of land that will not be used. Potentially, we could see NVR write off an additional 40,000 lots in the upcoming quarters, eliminating an additional $200 mm of book value. Given NVR trades at 3.8x book, an asset write-down of $200 mm could reduce the equity value by about $100/share, assuming that you keep the same egregious multiple of book.

all figures in $/thousands 2003 2004 2005 Q1 '06 Q2 '06 Q3 '06

Balance Sheet Data

Homebuilding inventory 523,773 588,540 793,9751,022,31

01,018,02

91,011,13

9

Contract land deposits 284,432 384,959 549,160 552,962 575,637 437,519

Total assets1,363,10

51,777,96

72,269,58

82,202,02

12,312,74

92,255,42

4

Notes and loans payable 257,859 213,803 463,141 281,654 371,388 371,203

Shareholders’ equity 494,868 834,995 677,162 773,8941,000,20

71,086,51

6

Deposits as a % of assets 20.9% 21.7% 24.2% 25.1% 24.9% 19.4%

From text of filings

Lots Controlled 70,000 83,500 105,000 104,000 103,000 98,000




Est. Lots contr. (adj for impair.) 70,000 83,500 105,000 104,000 98,000 84,500

$ deposits in cash 285,000 404,000 600,000 605,000 624,600 594,000Avg Deposit/lot (actual

amount) 4,071 4,838 5,714 5,817 6,064 6,061

Closings (LTM closings for quarterly data) 12,050 12,749 13,787 14,158 15,039 15,317

Years of Land (lots/LTM closings) 5.81 6.55 7.62 7.35 6.85 6.40

– (est lots/LTM closings) 5.81 6.55 7.62 7.35 6.55 5.53

Growth in closing 6.0% 5.8% 8.1%Growth in options 19.3% 25.7%Note: we believe that the $ deposits in cash and the controlled lots in the text of the SEC filings does not reflect the recent impairments of $106 mm ytd (hence the drastic increase in the difference between the balance sheet and $ deposits in cash found in the notes).

Management

The company’s management team, while claiming to act in the shareholders’ best interests through extensive share buybacks, has been taking home an extremely generous compensation packages, self-dealing, and actively selling shares. The extensive share buybacks, in essence, resulted in the management taking control of the company without paying a premium. The company is controlled by the management team through their option holdings. There are 5.754 mm basic shares outstanding, and 2.796 mm options outstanding (strike at $293). How many management teams do you know own 33% of the company strictly through free options? In fact, if you could name one, we would love to know.In terms of self-dealing, the following is found in the proxy. While the numbers were small, aren’t shareholders already paying this team enough money? After all, shareholders gave the management the keys to the kingdom in exchange for a couple of share buybacks.

From the Proxy – related party transactions

“During the year ended December 31, 2005, NVR entered into forward lot purchase agreements to purchase finished building lots for a total purchase price of approximately $41,000,000 with Elm Street Development, Inc., which is controlled by Mr. Moran. These transactions were approved by a majority of the independent members of the Board of Directors, and the finished lots under these transactions are expected to be purchased over the next three years at market prices. During 2005, NVR purchased 182 developed lots at market prices from Elm Street for approximately $29,000,000.NVR periodically leases, at market rates, an airplane owned by Mr. Schar for business-related company travel when the use of the airplane lends itself to business travel efficiencies. NVR’s independent directors annually review these expenditures. During 2005, NVR paid approximately $323,000 for business-related use of the airplane.

Current Valuation ($ in mm except per share figures)

Stock Price $585.99Diluted shares 7.0Equity Value 4,083.7Net Debt 132.6Enterprise Value 4,216.3

$ x2006E First Call P/E $88.79 6.6x2007E First Call P/E $53.31 11.0xBook Value/share $155.91 3.8xLTM EBITDA $1,074 3.9x




LTM FCF/share $67.86 11.6%

While NVR may seem reasonably valued on earnings and EBITDA, we believe it is difficult to value homebuilders on this basis given their earnings represent a match between current housing prices with land prices from up to 5 or 10 years ago. In the DC area, land values represent at least 30% of the cost of the home, if not more in certain areas. As mentioned earlier, we believe that contracts signed up to six years ago are responsible for much of NVR’s gross margin increase. However, without visibility on current contracted lot prices, one cannot extrapolate past earnings performance as a meaningful indicator of future earnings power. Therefore, valuing a homebuilder on earnings or EBITDA is flawed. To us, homebuilders are more like portfolio managers, and should be valued on their ability to manage their capital. As most banks and asset managers do not trade for more than 2x book, we believe this would be a fair place for NVR to trade. Given the $225 mm in asset write-down we expect, which would lower book value per share to $123, and a 2x multiple on that, our target for NVR is approximately $250/share.

In response to the cheap P/E and earnings power of the business, we believe that if you adjust NVR’s results for performance more in line with the industry, and for gross margins more in line with a non-bull market level, then you should have on-going normalized earnings at around $30/share. The current street expectations for 2007 do not reflect the recent order trends at NVR, and therefore expect a closing rate close to 20% above what their current order rate implies. At $250/share, you would trade at around 8x earnings, in line with overall homebuilding multiples.

Catalysts

1) Additional asset write-down in the next couple of quarters.2) Poor 2007 earnings performance

Risks1) Share buyback propping up the stock2) Substantial short interest3) Quick turn in the housing market in the next year, especially in the Washington DC area.4) Technically there is some takeout risk in the homebuilding market, but most of the homebuilders that are

mentioned as potentially acquirers are focused on purchasing assets below book value – in essence buying a builder for its land bank. Given NVR’s multiple and strategy, it seems an unlikely target.Catalyst1) Additional asset write-down in the next couple of quarters.2) Poor 2007 earnings performance

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NVR Inc.(NVR) - $590.00 on Oct 7, 2011 by golince

2011 2012Price: $590.00 EarningsPerShare: $26.97 $34.98

Shares Outstanding (in M): 6 P/E: 21.9x 16.9xMarket Cap (in $M): 3,540 P/FCF: 0.0x 0.0x

Net Debt (in $M): -829 EBIT (in $M): $0 $0TEV (in $M): 2,711 TEV/EBIT: 0.0x 0.0x




NVR is a homebuilder that has been written up twice before on VIC: In 2006 as a short candidate and in 2001 as a long. We believe that for investors with a reasonably long time horizon, NVR presently offers compelling value as a long and asymmetric risk/reward.

We would encourage readers to check out cmn3d's detailed piece on US housing which lays out a pretty good argument for a housing recovery.

Ok, so now for the case on NVR. To start with, let us say from the get-go that NVR is not the juiciest way to play a recovery in US housing as there are many other names out there with greater upside. However, we believe that NVR offers a very safe way to play this recovery while mitigating the chance of permanent impairment of capital. As evidence of the safety, we point out that NVR was FCF-negative during only 1 quarter of the most recent recession, a testament to the defensibility of its business model. The company has over $800mm of net cash on balance sheet. NVR currently trades at ~2x book, which may sounds high (it is much higher than all other homebuilders) but: A) NVR's long-term average multiple is about 4.3x, and B) NVR's unique business model and huge ROIC relative to other builders warrants a much higher book multiple.

Background on NVR

NVR builds and sells homes (mostly single-family detached) in 22 MSAs within 12 states in the eastern US. NVR also has a mortgage banking and title services company which primarily services its homebuilding operation. NVR is among the 5 largest homebuilders in the US.

NVR emerged from bankruptcy in 1992. The BK was the result of an overleveraged balance sheet that deteriorated in the housing recession of the late 1980s. Prior to BK, NVR was a full scale land developer, manufactured housing materials, had a more extensive finance arm, and was geographically diversified across the country. Post-BK, NVR refocused its business on the Mid Atlantic and Rust Belt, shedding the housing materials and most of the finance business, and ceasing to develop land and build on spec. In 1997, NVR bought Fox Ridge Homes for $20mm, giving it entry to the Nashville market. In 2005, NVR bought Marc Homebuilders for $8mm, in the Columbia SC market.

NVR is run by CEO Paul Saville, who has been with Ryan Homes (precursor to NVR) since 1981 and has been CEO for about 15 years. He owns 2.5% of the company, largely the result of LT incentive comp. Chairman Dwight Schar was CEO before Saville, having joined Ryan Homes in 1969. He owns 1% of the co.

Markets

65% of NVR's gross profit comes from the Mid-Atlantic (Wash DC, Baltimore, etc). 16% is Mid-East (Cinci, Cleveland, Pittsburgh), 11% is South East (Charlotte, Nashville) and 8% is North East (Philly).

What is important is that NVR's markets did not get nearly as overbuilt as some others in the country during the RE bubble. Peak-to-peak unit growth overall from 1986 to 2005 was only 0.3% CAGR. However, whereas in some very overbuilt markets there has been very little new construction in the past 5 years, in NVR's markets construction has continued at a slightly higher pace. The result is that current months of new home inventory is about 6 months for both NVR and for the country as a whole.

NVR has been a consistent market share gainer in its footprint. Estimated current mkt share is about 18%, about a double in share in the last 5 years (downturn). Prior to the downturn, NVR gained on average 60 bps of share per year since emerging from BK in the early 90s.

Business Model

NVR has a unique business model within the homebuilders that is predicated on two main points: 1) nearly 100% of land controlled is optioned rather than purchased on B/S, and 2) NVR is geographically dense (i.e. local economies of scale). The result of these aspects are that due to #1, NVR operates much more capital-light than other builders (as evidenced by its 50%+ after-tax ROIC through the cycle) and #2 allows for NVR to be far more efficient and low-cost in the markets in which it operates.




NVR considers itself more of an assembly line manufacturer than a custom home builder (per mgmt., "We like to think of ourselves as the In-N-Out Burger of Homebuilders".) NVR has 6 manufacturing and distribution facilities where they pre-assemble exterior and interior walls, stairs, railings, etc. Prefab packages are delivered to building sites where they can be assembled quickly. From day 1 of laying foundation, NVR can usually deliver a home in <90 days, often 60-70 (compared to ~100-120+ industry avg).

Consistent with its focus on efficiency, NVR offers fewer home models (4-5) per community and fewer customization options per model. If <20% of buyers select a given option, it is kicked out of the option pool for future communities. Importantly, NVR is NOT a spec builder; rather homes are constructed only after the receipt of a signed contract and deposit from a buyer.

NVR has an in-house mortgage banking business designed to underwrite loans for buyers of their homes. Loans are underwritten per the standards of the eventual loan owner (Wells Fargo, BofA, etc) and are held on B/S for <30 days on average.

NVR rarely buys land for development. Instead, NVR enters into options on land, paying 3-10% of aggregate purchase price as a premium. It can walk away at any time. It takes down finished lots on an as-needed basis as homes are contracted to be sold.

Mgmt. is compensated with a focus on shareholder value creation and a LT outlook. Most comp comes in RSUs and Options that vest over 4-5 years. Site managers are incentivized based on delivering homes quickly.

Cash is primarily used to buy back stock. NVR has bought back about 2/3 of co since 1994.

Investment Thesis in a Nutshell

NVR is a high quality, best-in-class homebuilder with a proven business model that was resilient to the worst residential real estate market in the last 80 years (profitable every quarter but 1). Current consensus sentiment on residential real estate is extremely bearish, presenting an intriguing entry point to own a high quality mean-reverter at a reasonable price.

Our normal year assumptions call for NVR to deliver about 17k homes, which implies flat market growth average-to-average from the last cycle to the next (recall that NVR's markets did NOT get overbuilt that much during the last cycle) and 13.5% market share for NVR (versus 18% today). We assume that NVR ASPs are flat for the next 2 years and then grow with inflation thereafter. Our model also calls for an Operating Margin about 50 basis points below NVR's long-term average despite the fact that they are more efficient operators today. We also assume that this "normal" year does not occur until 2016 (10 years after the beginning of the downturn). Thus, we view this case as a reasonably conservative case.

Assuming a recovery to this conservative "normal" in 2016 and prudent capital allocation (as NVR's history suggest should be the case), we should generate a high teens IRR on this investment from the current level. We get an option on a quicker recovery and/or a higher actual normal year, both of which are totally reasonable (and arguably more likely) outcomes. Downside is protected by the quality of the business, its proven resiliency during downturns, and the entry multiple.

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DISCUSSION


17 Golince 10/17/11 06:44 AMRE: cmn3d

Sorry, typo: search for member name cnm3d

16 jon64 10/17/11 04:21 AM cmn3d




# Author Date Subject PrivateI tried to find the real estate data you suggest by member "cmn3d" but couldn't seem to locate it... any suggestions? Is there a ticker to go with it?

15 September 10/14/11 03:31 PMRE: HomeFed

Yes. It's an interesting collection of Cali real estate managed by Leucadia. For example, they have a grape farm that is carried on the books for ~$5m, earned $1m in net income last year, and is for sale for $25m. All the land was acquired super cheap and the company is debt free, cash rich. They could probably move the raw land above book and they have a bunch of lots at a completed development that they are in no rush to sell, but could get well above book value based on historical sales. They claim to have interest in their lots at a completed development but they are waiting for better prices. I think over 12-18 months it could get liquidated for ~$25/share, but they have a bulletproof balance sheet so there is no rush.

They bought a big parcel in January out of bankruptcy for $11m. People were talking about a several hundred million dollar development on this parcel in 2003-2005, took on debt, got arrogant, and went bankrupt as the bubble burst and environmental regulations tripped them up. Its abstractly very undervalued since Leucadia have a great track record in real estate and I think that SoCal is long term sound based on the confluence of climate, demographics, and geographic barriers. SoCal was a good idea taken too far and now it’s cheap. Nothing exciting will happen for quite a while so it doesn't attract much interest. I have a small position, but we're talking 3 years minimum for stuff to play out and people to get excited about the business again.

14 oliver1216 10/14/11 01:05 PM RE: lots

Charlie479,

You make some interesting points. I'll give you my thoughts in the order you presented them:fixation - it's not that I have a fixation on the options, it's that this is by far the most common reason buyers of NVR seem to believe that NVR can achieve for many, many years something like double the ROE of other homebuilders. Without some advantage conveyed by the "asset-light" model, it becomes very hard to make the case that ROE's will be excessively high and therefore that NVR should be valued at well more than twice book value.

1. My understanding is that a large majority of the additional options since 2008 are ones that were previously written down and subsequently repriced and put back on the books.

2. You only speak of one side of the equation. Land prices and house prices have also fallen. NVR's ROE has dropped precipitously which tells me that the current options are much less valuable than they used to be.

3. 30%! that would be amazing. But ROE is about 10%. Are you subtracting out net cash? If so, then for the LTM it's a 19% return on non-cash assets. Pretty good. But 0% return on cash - why would anyone pay 2.5x book value for cash? Let's say they're the Apple of homebuilding and somehow get returns on non-cash assets to 30% (about triple the typical homebuilder). If they compound their non-cash assets at that rate for the next 5 years and then you add the current net cash you roughly get to today's value. So to be a buyer today and get a decent return, you have to think they do well north of 30%. That's a value stock? Also, if opportunities are available to buy these high return options, why do they have so much cash?

4. Definitely true. Homebuilders and land developers do this all the time. NVR competes with lots of other companies for land deals and options deals. That's my point. You have to believe NVR's ROE can be more than double other large homebuilders' for many, many years. During the huge bubble and bust the option model was clearly better, but why would it convey any advantage when the environment isn't so extreme? NVR makes a tradeoff of not using their balance sheet but paying higher prices for land. Under normal circumstances, the result gets you to the same returns as the other builders which is why other builders do some option buying and some land purchasing - it depends on the price which one provides better returns. Isn't it a disadvantage if you can only use options even if outright purchases are cheaper? I'd rather have the flexibility to do whichever would generate the highest risk-adjusted returns.

5. They controlled over 100,000 lots at one point, a lot fewer presently. In the normal course many of those options would have expired, but NVR got a nice windfall from being able to reprice some options during the depths of the bust. I don't think they can do that anymore but in the interim I believe they are still living off of that windfall. I suspect (only a suspicion) that they will have a very difficult time replicating their option pool going forward. My guess is that this means NVR's ROE will look like every other homebuilders'.





13 charlie479 10/13/11 10:36 PM lots

oliver1216,I think you're fixating on the land options and missing the main point, but let me try to satisfy the fixation anyway. The massage afterwards is free but gratuities are appreciated.

1. They are not having problems obtaining lots through options. Since the bubble burst, they have been able to steadily increase the number of lots controlled. They had 44,983 lots at 12/31/08, 46,337 at 12/31/09, and 52,310 at 12/31/10. Developers are apparently still willing to enter into these non-recourse option agreements.

2. The price of these options is not going up. They're going down. This is not surprising because when the price of the underlying drifts down or stagnates like land has recently, call options tend to get cheaper. This is good for NVR as a buyer. In 2007, NVR controlled 67,600 lots with a total notional of $6.9 billion with $405 million of deposits (aka "premium"). This works out to $6,000 per lot or a premium of 5.9%. The following year it fell to $4,500 and 4.9%. In 2010 it was still lower at $3,600 and 3.9%.

3. They're able to generate a decent return at current option prices. 30% pretax return on tangible capital is decent, albeit not stellar (though I think that has less to do with land options than lack of scale volume).

4. Many other builders use options to control some of their lots (but they also control other lots in their inventory by owning land too). These limited-recourse fixed-price purchase agreements that we're calling options are not an unusual arrangement. Land options are not some tricky thing that NVR invented that will disappear because developers 'have caught on'.

5. These option agreements are not as long in duration as you think. The 2002 inventory of optioned lots would basically all be exercised or expired by now. From 2002 to 2010 NVR has sold 108,419 homes. It's been awhile since I've owned or looked closely at NVR (except now - thanks for the memories, VIC!) but I do not remember seeing a secret stash of optioned lots at HQ that would have been big enough to deliver that many homes. Also, are we even sure that land options struck at 2002 prices would be considered "really, really cheap" today?

One could construct a legitimate bear case for NVR here but I think basing that case on the land options would be using a weak foundation, in my opinion.

12 oliver1216 10/13/11 05:47 PMValuation

I second Nails4's last question. I think it's likely to be true that they have a pile of old and/or repriced options that date back a number of years and I question whether those options can be economically replaced. I would think a buyer of this stock would need to know the answer.

11 september 10/13/11 04:26 PMValuation

HomeFed (HOFD) is a bizarre Leucadia controlled land development company in SoCal that is publicly traded. They have sold options on land recently. It's going to depend on the developer. They have no debt and buy land very cheap so they can be flexible. From their 10-K:

"As of February 9, 2010, the Company has entered into an agreement with a homebuilder that has not closed to sell 32 single family lots for aggregate cash proceeds of $7,000,000, pursuant to which it had received a non-refundable option payment of $650,000. The option payment is non-refundable if the Company fulfills its obligations under the agreement, and will be applied to reduce the amount due from the purchaser at closing. Although this agreement is binding on the purchaser, should the Company fulfill its obligations under the agreement within the specified timeframes and the purchaser decides not to close, the Company’s recourse will be primarily limited to retaining the option payment."

I think in an uncertain homebuilding environment, options become more attractive to both parties. A developer selling options on a lot to a homebuilder has the benefit of some income while giving the homebuilder some flexibility in selling homes on the lots. A developer doesn't have to sell an option unless the strike price is attractive. It's to the detriment of a developer if they offload land and put a builder in a position where they have to offload homes they built. It would put downward pressure on future land and home sales in surrounding lots since real estate transactions love comps.

10 oliver1216 10/13/11 03:58 PM RE: RE:




# Author Date Subject PrivateRE: RE: RE: RE: RE: RE: Valuation

Utah, you're making my case for me. Why would anyone sell a call option? Simple - to maximize their profit. The more successful the seller of those options, the worse off the buyer is (in this case NVR). To expect a buyer to continually be able to make outsize profits buying options is to continually expect the sellers to misprice those options too low. I think that's a lot to count on in order for an investment to work out satisfactorily.

In any burgeoning bubble we will no doubt find, in retrospect, that options were priced too low as prices increased rapidly. But now that this bubble has burst what's the case for expecting NVR to be able to continue to find mispriced options (i.e. find foolish developers) indefinitely?

And why is everyone just assuming favorable option deals exist? Has anyone actually looked at any land option deals and examined the pricing terms? I'm surprised to find on a board focused on value investing so many people who are unconcerned about PRICE. The price of the options makes all the difference. Are these options cheap now? After the bubble are they deemed too risky by the sellers after NVR and others walked away from so many options? Are they available at all? If they are available why is NVR sitting on such a large pile of cash which earns no return?

9 oliver1216 10/13/11 12:13 PM

RE: RE: RE: RE: RE: RE: Valuation

False analogies notwithstanding, the act of homebuilding in its entirely entails purchasing land, developing the land and then selling the land. The highly experienced integrated homebuilders have over many, many years generated decent but not great investment returns on this entire process as a whole (very low double digits). You could, in theory, bifurcate the process into high ROI and low ROI activities. This means that if NVR's ROI is higher than the entire process, then the land developers' ROI is lower. But shouldn't the party taking the higher risk (i.e. the land developer) get a higher return? If they're not getting a higher return, then it's back to my original assertion - NVR's theoretical future high ROE relies on the foolishness of developers. Can this be counted on in the future or was it an artifact of the bubble? Isn't it possible that post-bubble risk aversion could increase the cost of options so that they are economically detrimental compared to outright land purchases? Has anyone looked into this or are the owners of NVR comfortable blithely assuming that options are always better, no matter the price?

I would also add that even a foolish developer would at least target a decent return on capital. If they priced their investment to have a 10% cash on cash return (is that enough to justify the risk?) do you expect NVR to get a 20% return on its investment on top of that? 1 + 1 = 3? Without dumb developers, I just don't see how it adds up. (note: I'm not dismissing the claim that NVR is a particularly good builder, I just can't see how that can get them from a 10% ROE to a 20% ROE over a whole lot of years. A couple hundred basis points maybe. There are plenty of companies that know how to build homes cheaply).

8 chuck307 10/12/11 10:15 PM Valuation

I don't think you framed your argument fairly. Even if the land business were decent it doesn't mean it's as good a business as NVR's building business. Thus, if NVR can use options on a value neutral basis vs. owning the land, if the options strategy allows it to direct a greater portion of its resources toward building and have less capital tied up in a lower returning land business, it's a good thing to do. Actually, depending on the return discrepancy between land and building, you can argue it's not a bad decision to use options even if they have worse economics than owned land (on a standalone basis), if by using options they can direct a greater portion of capital toward building.There is no economic law that says all economic activities pay a similar return.

7 oliver1216 10/12/11 07:07 PMValuation

The 3 replies all agree: it's beneficial NOT to have land on your books. Perhaps, but doesn't it depend on the




# Author Date Subject Privateprice? At a sufficiently high option price, buying the land outright would be the better deal. How does the current price of options compare to what they were a few years ago? No one seems to want to answer that question but instead assume options are ALWAYS better. That can't be true, it depends on the price.NVR doesn't like to hold land but SOMEONE has to hold the land don't they? It's the land developers and either they're getting a terrible deal from which NVR benefits or they are adequately charging NVR the cost associated with tying up all that capital. If it's the latter, then there is no benefit to the option strategy. And why wouldn't developers weigh the total cost of a sale of all the land versus the risks and costs of capital associated with selling options and choose the higher value? Unless we think they are fools willing to bear all of the costs and risks associated with holding land and not adequately charge for it.

Now that bubble lending is over and developers have to put real money into their investments, I think there's a serious danger that NVR can no longer get option deals that provide the outsize returns on investment needed to grow the book value sufficiently to provide returns for investors. I think this is borne out in their mundane ROEs generated since the bubble burst (average ROE of only about 11% over the past 3 years). I don't see how they can get ROEs back to a level sufficient to justify a 2.4x P/B (~20% for nearly 10 years, in my opinion) unless land developers decline to charge NVR the cost of holding land. Regardless, in order for this to be a value stock one has to be CERTAIN that NVR can do just that. You sure?

6 charlie479 10/12/11 02:46 PMValuation

oliver1216,I'll echo what september and utah1009 have said. NVR generates a good return on book value because homebuilding (without land development) is itself a decent-return activity; NVR wasn't getting those high returns because they were screwing the land developers. Note that NVR is still generating 30% return on tangible capital in one of the worst homebuilding environments in history, when it's now pretty unlikely anyone is capturing any supposed option-related excess returns.

If you took away the option agreements, and restructured the industry so that land owners sold to homebuilders on a just-in-time basis (as homes were sold), I think you'd still see the homebuilding operations with good ROCs and the land developers with poor ROCs (but maybe decent ROE after leverage). They're two different businesses with different return characteristics. Options just happen to be the way NVR separates itself from the land business.

There are plenty of industries where high ROC lines of business persist alongside low ROC lines. Hotel management companies’ work alongside property owners, shipping/logistics companies work with trucking companies, seismic operators work with ship owners, etc. Why do all of the people in the low return businesses keep doing this and not get into high return businesses? It could be the same reason that investors keep buying low return businesses: hope springs eternal for the turnaround always around the corner.

5 september 10/12/11 01:37 PMValuation

In terms of the balance sheet, all of the assets/working capital are on someone else's balance sheet. NVR had property write downs of ~$500m since the bubble burst. That's peanuts next to Pulte Home's >$5bn in property write downs. Theoretically, all the land that NVR can/will develop exists, a developer can only extract so much of the final price, and NVR vis-a-vis other builders can pay more for land since their costs are lower. It's clearly an advantage in not having the land on the books.

What I find curious is that in terms of low cost commodity producers, NVR looks more process oriented (Southwest) than systemic (GEICO) in its competitive advantage. Plenty of low cost airlines pop up all the time, whereas Allstate is getting murdered in car insurance and GEICO/PGR have never been doing better. The benefits are so clear of the NVR approach - high share price, high compensation, happy shareholders, happy management - all the agents are aligned to push for this at other builders. I don't understand how competition hasn't emerged by copying the process. Do you know of any homebuilders trying the NVR approach or are there any rumblings of it being attempted in the near future? They started on their current path when they were in distress and had a reality check. Is anyone else having this epiphany in the space?

4 oliver1216 10/12/11 10:48 AMValuation

The shares are trading at just under 2.5x tangible book value. If one assumes cash is worth cash the situation is much worse - the market is valuing NVR's non-cash net assets in excess of 4x book value. If this is a value stock at the current price, the implication is that NVR must generate a very high return on its book value for many, many years. The assertion as to why this is possible rests on the notion that NVR's option strategy enables it to generate excessive returns and is sustainable. The corollary, however, is that if NVR is making




# Author Date Subject Privateoutsized returns on its options then the seller of those options is making excessively poor returns. Who are these people and why do they keep doing this?

During the bubble NVR was able to generate very high returns (just as one would have buying options on internet stocks in the prior bubble) but have generated mundane returns since. During the bubble, banks would lend 95% of the cost of buying and developing land with only a 5% premium paid by NVR on an option to buy the developed parcels. This allowed developers, using no money, to spring up like flowers after a rain. NVR, at a low cost, put numerous developers in business and was able to secure 10s of thousands of lots, many of which they subsequently walked away from. But banks certainly won't do that anymore and developers actually have to have money in their investments now. A land developer has a choice: sell the whole property outright, sell individual plots, sell homes like a homebuilder or sell options to a homebuilder. Assuming developers who actually have skin in the game and know the market reasonably well are reasonable investors, how can we be comfortable that NVR can make the requisite excessive returns for an extended period of time necessary for shareholders to make even a moderate return? And how can investors expect high levels of return on investment if the company is spending a large amount of cash repurchasing shares at a high multiple to book value (which serves to lower book value per share)?

3 charlie479 10/07/11 11:22 PM Nails4

Is there any way to quantify these savings on a per unit basis?

That's an interesting question. One possible approach: take cost of sales (excluding land impairments) and divide by the number of delivered homes in a year to get their average cost per home. If you call the company and can get them to share with you the average square footage per home sold (or maybe estimate from the blueprints of their most popular models), you can get an approximate cost per square foot. If you did this with several public builders, you might be able to get some idea of the difference in efficiency, although you'd want to choose builders operating in similar geographic areas and selling comparable homes. I'd be interested in seeing a recent comparison. Who wants to volunteer to do this? Not it.

If you don't want to go through that much effort and just want to get a rough approximation, you might be OK assuming that builders on average aren't able to charge a price premium for their product. If two builders build the same home, homebuyers aren't going to pay extra dollars per square foot (on average) for a NVR home vs. a Ryland home or vice versa. If you make that assumption, then you're probably fine just looking at Cost of Sales (excl impairements) as a % of Sales. I looked quickly just now at a few of the builders and saw differences of as much as 700 bps, which is not that small on a ~$300k house.

2 charlie479 10/07/11 10:39 PMRE: Expenses

utah1009,

I think part of the reason you do not see a decline in G&A vs 2004 is because they did not adopt SFAS 123R (Accounting for Stock-based Compensation) until 2006. So, the 2004 number you are looking at has no stock comp expense whereas the TTM figure includes $64 mil of stock comp expense. These guys have also been pretty liberal with the options gravy.

1 golince 10/07/11 02:28 PMRE: Some Qs

Nails,It's a fair question and one that we have spent some time thinking about. During normal times, the answer is that NVR has a significant cost advantage over competitors which allows it to pass along some of the value to the buyer. Hence the buyer gets a better home for a cheaper price when buying from NVR.The cost advantages have 2 primary sources. First is the local economies of scale that NVR achieves, which allows them to leverage the fairly significant on-site and market-related SG&A that homebuilding entails. Second is NVR's assembly-line like process.

These advantages while meaningful are not enormous though. This is why NVR has been a steady share gainer during normal years (they average about 60 bps of share gains per year).

In addition, NVR simply executes very well. They seem to get more efficient each year, and as they grow they get additional purchasing advantages on raw materials, etc. This allows them to maintain margins.The huge share gains we've seen recently (NVR has double share gains in the last 5 years) have a different explanation: their peers which were more poorly capitalized (debt and/or on-balance sheet land) exited the




# Author Date Subject Privatebusiness. This is why our normalized case assumes that NVR's current 18% market share declines to 13.5% over time - some of these peers at least will come back into the business.

Hope that helps.

APPENDIXAS OF DATE: 2001-03-07 NVR 2000 10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ____ to _______________

Commission file number 1-12378

NVR, Inc.- -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter)

Virginia 54-1394360- --------------------------------------------- -----------------------(State or other jurisdiction of incorporation (IRS employer or organization) identification number)

7601 Lewinsville Road, Suite 300 McLean, Virginia 22102 (703) 761-2000- -------------------------------------------------------------------------------- (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ____________

Securities registered pursuant to Section 12(b) of the Act: -----------------------------------------------------------

Title of each class Name of each exchange on which registered ------------------- -----------------------------------------Common stock, par value American Stock Exchange $0.01 per share

Securities registered pursuant to Section 12(g) of the Act: None -----------------------------------------------------------

Indicate by check mark whether the registrant (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes X No__ ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405of Regulation S-K is not contained herein, and will not be contained, to thebest of registrant's knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment to this




Form 10-K.[_]

As of February 22, 2001 the aggregate market value of the voting stock held bynon-affiliates of NVR, Inc. based on the closing price reported on the AmericanStock Exchange for the Common Stock of NVR, Inc. on such date was approximately$986.5 million. As of February 22, 2001 there were 8,366,862 total shares ofcommon stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCEPortions of the Proxy Statement of NVR, Inc. to be filed with the Securities andExchange Commission pursuant to Regulation 14A of the Securities Exchange Act of1934 on or prior to April 30, 2001 are incorporated by reference into Part IIIof this report.

Page 1 of 123 pages The Exhibit Index begins on page 17.

1<PAGE>

INDEX

<TABLE><CAPTION>PART I Page- ------ ----<S> <C>Item 1. Business......................................................................... 3Item 2. Properties....................................................................... 6Item 3. Legal Proceedings................................................................ 6Item 4. Submission of Matters to a Vote of Security Holders.............................. 7 Executive Officers of the Registrant............................................. 7PART II- -------

Item 5. Market for Registrants' Common Equity and Related Shareholder Matters............ 7Item 6. Selected Financial Data.......................................................... 8Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................ 8Item 7A. Quantitative and Qualitative Disclosure About Market Risk........................ 13Item 8. Financial Statements and Supplementary Data...................................... 16Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................................. 16

PART III- --------

Item 10. Directors and Executive Officers of the Registrant............................... 16Item 11. Executive Compensation........................................................... 16Item 12. Security Ownership of Certain Beneficial Owners and Management................... 16Item 13. Certain Relationships and Related Transactions................................... 16

PART IV- -------

Item 14. Exhibits and Reports on Form 8-K................................................. 17<PAGE>

PART I ------Item 1. Business- ------- --------

General

NVR, Inc. ("NVR") was formed in 1980 as NVHomes, Inc. NVR operates in twobusiness segments: 1) the construction and marketing of homes and 2) mortgagebanking. During 2000, NVR conducted its homebuilding activities both directlyand indirectly through its wholly owned subsidiary, Fox Ridge Homes, Inc. OnDecember 31, 2000, NVR merged Fox Ridge Homes, Inc. into NVR. NVR now conducts




all homebuilding activity directly. NVR conducts its mortgage bankingoperations primarily through another wholly owned subsidiary, NVR MortgageFinance, Inc. ("NVR Finance"). Unless the context otherwise requires,references to "NVR" include its subsidiaries.

NVR is one of the largest homebuilders in the United States and in theWashington, D.C. and Baltimore, Maryland metropolitan areas. NVR derived anaggregate of approximately 61% and 62% of its 2000 and 1999 homebuildingrevenues, respectively, from the Washington, D.C. and Baltimore, Marylandmetropolitan areas. NVR's homebuilding operations construct and sell single-family detached homes, townhomes and condominium buildings under threetradenames: Ryan Homes, NVHomes and Fox Ridge Homes. The Ryan Homes product isbuilt in eighteen metropolitan areas located in Maryland, Virginia,Pennsylvania, New York, North Carolina, South Carolina, Ohio, New Jersey,Delaware and Tennessee. The Fox Ridge Homes product is built in the Nashville,Tennessee metropolitan area. The Ryan Homes' and Fox Ridge Homes' products aremoderately priced and marketed primarily towards first-time and first time move-up buyers. The NVHomes product is built largely in the Washington, D.C.metropolitan area, and is marketed primarily to move-up and upscale buyers. In2000, the average price of a unit settled by NVR was approximately $224,600.

NVR obtains land for homebuilding by acquiring control over finishedbuilding lots through option contracts with land developers that requireforfeitable deposits. This lot acquisition strategy reduces the financialrequirements and risks associated with direct land ownership and landdevelopment. NVR generally seeks to maintain control over an inventory of lotsbelieved to be suitable for the next 18 to 24 months of projected home salesvolumes in the various communities in which it operates.

In addition to building and selling homes, NVR provides a number ofmortgage-related services through its regional mortgage banking operations,which operate in 10 states. During the first quarter of 2000, NVR formulated adetailed plan to align its mortgage banking operations to exclusively serve theCompany's homebuilding customers. The plan specifically entailed the closure ofall of the Company's retail operations, including all of the retail branchesacquired from the acquisition of First Republic Mortgage Corporation ("FirstRepublic") in March 1999. This action is consistent with the Company's decisionin December 1999 to exit the wholesale mortgage origination business.

NVR's mortgage banking business generates revenues primarily from originationfees, gains on sales of loans, title fees, and sales of servicing rights. In2000, NVR's mortgage banking business closed approximately 11,600 loans with anaggregate principal amount of approximately $1.7 billion. NVR's homebuildingcustomers accounted for 71% of the aggregate dollar amount of loans closed in2000. Based on NVR's mortgage banking segment's restructuring described above,substantially all of the mortgage banking segment's ongoing loan closings willbe for NVR's homebuilding customers. NVR's mortgage banking business sells allof the mortgage loans it closes into the secondary markets, and also sellssubstantially all of its originated mortgage servicing rights on a flow basis.The servicing portfolio balance at December 31, 2000 was approximately $275million in principal amounts of loans serviced.

Segment information for NVR's homebuilding and mortgage banking businessesis included in note 2 to NVR's consolidated financial statements.

3<PAGE>

Homebuilding

Products

NVR offers single-family detached homes, townhomes, and condominiumbuildings with many different basic home designs. These home designs have avariety of elevations and numerous other options. Homes built by NVR combinetraditional or colonial exterior designs with contemporary interior designs andamenities. NVR's homes range from approximately 985 to 5,400 square feet, withtwo to five bedrooms, and are priced from approximately $76,000 to $1,200,000.

Markets




The following table summarizes settlements and contracts for sales of homesfor each of the last three years by region:

<TABLE><CAPTION> Contracts for Sale Settlements (Net of Cancellations) Year Ended December 31, Year Ended December 31, -------------------------- -----------------------Region 2000 1999 1998 2000 1999 1998- ------ ------ ----- ----- ------ ----- -----<S> <C> <C> <C> <C> <C>Washington/Baltimore 5,208 5,073 4,358 5,305 5,215 5,165Other (1) 4,847 4,243 3,264 4,963 4,463 3,835 ------ ----- ----- ------ ----- -----Total 10,055 9,316 7,622 10,268 9,678 9,000 ====== ===== ===== ====== ===== =====</TABLE>

(1) Includes Pennsylvania, New York, North Carolina, South Carolina, Ohio, NewJersey, Tennessee, Delaware and Richmond, Virginia.

Backlog

Backlog units and dollars were 5,148 and $1.3 billion respectively, atDecember 31, 2000 compared to backlog units of 4,935 and dollars of $1.1 billionat December 31, 1999.

Construction

Independent subcontractors under fixed-price contracts perform constructionwork on NVR's homes. The subcontractors' work is performed under thesupervision of NVR employees who monitor quality control. NVR uses manyindependent subcontractors in its various markets and is not dependent on anysingle subcontractor nor on a small number of subcontractors.

Sales and Marketing

NVR's preferred marketing method is for customers to visit a furnishedmodel home featuring many built-in options and a landscaped lot. The garages ofthese model homes are usually converted into temporary sales centers wherealternative facades and floor plans are displayed and designs for other modelsare available for review. Sales representatives are compensated predominantlyon a commission basis.

Regulation

NVR and its subcontractors must comply with various federal, state andlocal zoning, building, environmental, advertising and consumer credit statutes,rules and regulations, as well as other regulations and requirements inconnection with its construction and sales activities. All of these regulationshave increased the cost required to market NVR's products. Counties and citiesin which NVR builds homes have at times declared moratoriums on the issuance ofbuilding permits and imposed other restrictions in the areas in which sewagetreatment facilities and other public facilities do not reach minimum standards.To date, restrictive zoning laws and the imposition of moratoriums have not hada material adverse effect on NVR's construction activities. However, there isno assurance that such restrictions will not adversely affect NVR in the future.

4<PAGE>

Competition, Market Factors and Seasonality

The housing industry is highly competitive. NVR competes with numeroushomebuilders of varying size, ranging from local to national in scope, some ofwhom have greater financial resources than NVR. NVR also faces competition fromthe home resale market. NVR's homebuilding operations compete primarily on thebasis of price, location, design, quality, service and reputation. NVR'shomebuilding operations historically have been one of the market leaders in eachof the markets where NVR operates.




The housing industry is cyclical and is affected by consumer confidencelevels, prevailing economic conditions and interest rates. Other factors thataffect the housing industry and the demand for new homes include theavailability and increases in the cost of land, labor and materials, changes inconsumer preferences, demographic trends and the availability of mortgagefinance programs.

The results of NVR's homebuilding operations generally reflect theseasonality of the housing market in the Middle Atlantic region of the UnitedStates. NVR historically has entered into more sales contracts during the firstand second quarters.

NVR is dependent upon building material suppliers for a continuous flow ofraw materials. Whenever possible, NVR utilizes standard products available frommultiple sources. Such raw materials have been generally available in adequatesupply.

Mortgage Banking

NVR provides a number of mortgage related services to its homebuildingcustomers and to other customers through its mortgage banking operations. Themortgage banking operations of NVR also include separate companies that brokertitle insurance and perform title searches in connection with mortgage loanclosings for which they receive commissions and fees.

NVR's mortgage banking business sells all of the mortgage loans it closesto investors in the secondary markets, rather than holding them for investment.NVR's wholly owned subsidiary, NVR Finance, is an approved seller/servicer forFNMA, GNMA, FHLMC, VA and FHA mortgage loans. NVR's mortgage banking operationsalso sell substantially all originated mortgage servicing rights on a flowbasis. The size of its servicing portfolio was approximately $275 million inprincipal amount of loans being serviced at the end of 2000 compared toapproximately $220 million at December 31, 1999.

Mortgage-Backed Securities

NVR's limited purpose subsidiary ("Limited-Purpose Financing Subsidiary")was organized to facilitate the financing of long-term mortgage loans throughthe sale of bonds collateralized by mortgage-backed securities. These mortgage-backed securities include certificates guarantying the full and timely paymentof principal and interest by FNMA, GNMA and FHLMC. There have been no bondsissued since 1988. Only one series of bonds issued remains outstanding. Theremaining series has an early call feature that will allow NVR to retire thebonds at NVR's option in October 2001.

Competition and Market Factors

NVR's mortgage banking operations operate through 28 offices in 10 states.Their main competition comes from national, regional, and local mortgagebankers, thrifts and banks in each of these markets. NVR's mortgage bankingoperations compete primarily on the basis of customer service, variety ofproducts offered, interest rates offered, prices of ancillary services andrelative financing availability and costs.

Regulation

NVR Finance is an approved seller/servicer of FNMA, GNMA, FHLMC, FHA and VAmortgage loans, and is subject to all of those agencies' rules and regulations.These rules and regulations restrict certain activities of NVR Finance. NVRFinance is currently eligible and expects to remain eligible to

5<PAGE>

participate in such programs. However, any significant impairment of itseligibility could have a material adverse impact on its operations. In addition,NVR Finance is subject to regulation at the state and federal level with respectto specific origination, selling and servicing practices.

Employees




At December 31, 2000, NVR employed 2,752 full-time persons, of whom 1,030were officers and management personnel, 188 were technical and constructionpersonnel, 449 were sales personnel, 340 were administrative personnel and 745were engaged in various other service and labor activities. None of NVR'semployees are subject to a collective bargaining agreement and NVR has neverexperienced a work stoppage. Management believes that its employee relationsare good.

Item 2. Properties- ------- ----------

NVR's executive offices are located in McLean, Virginia, where NVRcurrently leases office space for a nine and one-half year term expiring inMarch 2005.

NVR's manufacturing facilities are located in Thurmont, Maryland;Farmington, New York; Clover, South Carolina; Darlington, Pennsylvania; andPortland, Tennessee. NVR has leased the Thurmont and Farmington manufacturingfacilities for a term expiring in 2014 with various options for extension of theleases and for the purchase of the facilities. The Clover, Darlington andPortland leases expire in 2002, 2005 and 2004, respectively, and also containvarious options for extensions of the leases and for the purchase of thefacilities.

NVR also leases office space in 72 locations in 10 states for fieldoffices, mortgage banking and title services branches under leases expiring atvarious times through 2009. NVR anticipates that, upon expiration of existingleases, it will be able to renew them or obtain comparable facilities onacceptable terms.

Item 3. Legal Proceedings- ------- ------------------

During April 1999, NVR was served with a lawsuit filed in the United StatesDistrict Court in Baltimore by a group of homeowners who purchased homes in acommunity in Howard County, Maryland. The suit alleges violation of certainFederal environmental laws, as well as State consumer protection and relatedstatutes arising from the alleged failure of NVR to disclose to its purchasersthat their homes were built either on or adjacent to a site formerly used as anunlicensed landfill. The developer of the property, another homebuilder andvarious engineering firms are also named as defendants in the action. Theplaintiffs are seeking various forms of relief and monetary damages ofapproximately $75,000,000. The developer and the other homebuilder have settledtheir claims with the homeowners. Extensive discovery is nearly complete andthe parties have filed a series of motions that will be acted upon by April 2001and which would, if granted, resolve a number of major issues in the litigation.The lawsuit is scheduled for trial in May 2001. NVR believes that it has validdefenses to the plaintiffs' claims and has and will continue to vigorouslydefend the case. No assurances can be given, however, regarding the risk orrange of possible loss to NVR, if any.

Except as otherwise noted, NVR is not involved in any legal proceedingsthat are likely to have a material adverse effect on its financial condition orresults of operations.

Item 4. Submission of Matters to a Vote of Security Holders.- ------- ----------------------------------------------------

On October 25, 2000, NVR commenced a consent solicitation of the holders ofits 8% Senior Notes due 2005 ("Notes") to amend the underlying Indenture of theNotes. The purpose of the proposed amendment was to provide NVR with greaterflexibility to continue to repurchase shares of its outstanding common stock aspart of its strategy of maximizing shareholder value.

On November 10, 2000, the Company amended the consent solicitation datedOctober 25, 2000 to extend

6<PAGE>




the consent period from November 13, 2000 to November 16, 2000. In addition, theamended consent solicitation increased the cash payment to be made for tenderedconsents to the Note holders from 1% to 4% of the principal amount of the Notesheld. The consent solicitation expired without the Company receiving therequisite number of consents to approve the amendment to the Indenture.

Executive Officers of the Registrant

<TABLE><CAPTION>

Name Age Positions ---- --- --------- <S> <C> <C> Dwight C. Schar 59 Chairman of the Board, President and Chief Executive Officer of NVR William J. Inman 53 President of NVR Mortgage Finance, Inc. James M. Sack 50 Vice President, Secretary and General Counsel of NVR Paul C. Saville 45 Senior Vice President Finance, Chief Financial Officer and Treasurer of NVR Dennis M. Seremet 45 Vice President and Controller of NVR</TABLE>

Dwight C. Schar has been chairman of the board, president and chief executive officer of NVR since September 30, 1993.

William J. Inman has been president of NVR Mortgage Finance, Inc. since January 1992.

James M. Sack has been vice president, secretary and general counsel of NVR since September 30, 1993. Mr. Sack is currently principal of the law firm Sack & Harris, P.C. in McLean, Virginia.

Paul C. Saville has been senior vice president finance, chief financial officer and treasurer of NVR since September 30, 1993.

Dennis M. Seremet has been vice president and controller of NVR since April 1, 1995.

PART II -------

Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.- ------- ----------------------------------------------------------------------

NVR's shares of common stock are listed and principally traded on theAmerican Stock Exchange ("AMEX"). The following table sets forth for theperiods indicated the high and low closing sales prices per share for the years2000 and 1999 as reported by the AMEX.

HIGH LOW ------ ----

Prices per Share:

1999: First Quarter........ 47.00 41.00 Second Quarter....... 52.19 41.94 Third Quarter........ 57.19 50.50 Fourth Quarter....... 50.81 38.00

2000: First Quarter........ 54.56 42.50 Second Quarter....... 63.25 52.75 Third Quarter........ 81.00 57.38 Fourth Quarter....... 124.60 76.00

As of the close of business on February 22, 2001, there were 796shareholders of record.




NVR has not paid any cash dividends on its shares of common stock duringthe years 2000 or 1999. NVR's bank indebtedness and the indenture governingNVR's 8% Senior Notes due 2005 contain

7<PAGE>

restrictions on the ability of NVR to pay dividends on its common stock. Seenote 6 to the financial statements for a detailed description of the Senior Noterestrictions.

Item 6. Selected Financial Data (dollars in thousands, except per share amounts)- ------- -----------------------

The following tables set forth selected consolidated financial informationfor NVR. The selected income statement and balance sheet data have beenextracted from NVR's consolidated financial statements for each of the periodspresented. The selected financial data should be read in conjunction with, andis qualified in its entirety by, the consolidated financial statements andrelated notes included elsewhere in this report.

<TABLE><CAPTION> Year Ended December 31, ---------------------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ----

Consolidated Income Statement Data:Homebuilding data: Revenues $2,267,810 $1,942,660 $1,504,744 $1,154,022 $1,045,930 Gross profit 433,751 331,933 230,929 158,167 139,675Mortgage Banking data: Mortgage banking fees 38,757 48,122 42,703 25,946 24,029 Interest income 6,541 13,556 9,861 6,415 5,351 Interest expense 3,016 7,504 6,120 3,544 2,249Consolidated data:Income before extraordinary loss $ 158,246 $ 108,881 $ 66,107 $ 28,879 $ 25,781 Income before extraordinary loss per diluted share (1) $ 14.98 $9.01 $4.97 $2.18 $1.70

December 31, ---------------------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ----Consolidated Balance Sheet Data: Homebuilding inventory $ 334,681 $ 323,455 $ 288,638 $ 224,041 $ 171,693 Total assets 841,260 767,281 724,359 564,621 501,165 Notes and loans payable 173,655 278,133 320,337 248,138 201,592 Equity 247,480 200,640 165,719 144,640 152,010 Cash dividends per share - - - - -

(1) For the years ended December 31, 2000, 1999, 1998, 1997 and 1996, incomefrom continuing operations per diluted share was computed based on 10,564,215,12,088,388, 13,300,064, 13,244,677 and 15,137,009 shares, respectively, whichrepresents the weighted average number of shares and share equivalentsoutstanding at each relevant date.

Item 7. Management's Discussion and Analysis of Financial Condition and Results- ------- ----------------------------------------------------------------------- of Operations ------------- (dollars in thousands except per share data) --------------------------------------------

A Cautionary Note Regarding Forward-Looking Statements




Some of the statements in this Form 10-K, as well as statements made by NVRin periodic press releases or other public communications, constitute "forward-looking statements" within the meaning of the Private Securities LitigationReform Act of 1995. Certain, but not necessarily all, of such forward-lookingstatements can be identified by the use of forward-looking terminology, such as"believes," "expects," "may," "will," "should," or "anticipates" or the negativethereof or other comparable terminology. All statements other than ofhistorical facts are forward looking statements. Forward looking statementscontained in this document include those regarding market trends, NVR'sfinancial position, business strategy, projected plans and objectives ofmanagement for future operations. Such forward-looking statements involve knownand unknown risks, uncertainties and other factors that may cause the actualresults or performance of NVR to be materially different from future results,performance or achievements expressed or implied by the forward-lookingstatements. Such risk factors include, but are not limited to the following:general economic and business conditions (on both a national and regionallevel); interest rate changes; access to suitable financing; competition; theavailability and cost of land and other raw materials used by NVR in itshomebuilding operations; shortages of labor; weather related slow downs;

8<PAGE>

building moratoria; governmental regulation; the ability of NVR to integrate anyacquired business; fluctuation and volatility of stock and other financialmarkets; and other factors over which NVR has little or no control.

Results of Operations for the Years Ended December 31, 2000, 1999 and 1998

NVR, Inc. ("NVR") operates in two business segments: homebuilding andmortgage banking. Corporate general and administrative expenses are fullyallocated to the homebuilding and mortgage banking segments in the informationpresented below.

Homebuilding Segment

Homebuilding revenues for 2000 increased 17% to $2,267,810 compared torevenues of $1,942,660 in 1999. The increase in revenues was primarily due toan 8% increase in the number of homes settled to 10,055 in 2000 from 9,316 in1999, and to an 8% increase in the average settlement price to $224.6 in 2000from $207.7 in 1999. The increase in settlements is a direct result of thesubstantially higher backlog at the beginning of the 2000 period as compared tothe beginning of the same 1999 period. The increase in the average settlementprice is attributable to price increases in certain of the Company's markets andto a larger number of settlements of higher-priced single family detached homes.New orders for 2000 increased by 6% to 10,268 units compared with 9,678 unitsfor 1999. The increase in new orders was predominantly the result of increasedsales in markets outside the Baltimore/Washington area.

Homebuilding revenues for 1999 increased 29% to $1,942,660 compared torevenues of $1,504,744 in 1998. The increase in revenues was primarily due to a22% increase in the number of homes settled to 9,316 in 1999 from 7,622 in 1998,and to a 6% increase in the average settlement price to $207.7 in 1999 from$196.4 in 1998. The increase in settlements is a direct result of thesubstantially higher backlog at the beginning of the 1999 period as compared tothe beginning of the same 1998 period. The increase in the average settlementprice is attributable to single family detached units representing a largerpercentage of the total units settled in the current period as compared to theprior year period, and to price increases in certain of NVR's markets. Neworders for 1999 increased by 8% to 9,678 units compared with 9,000 units for1998. The increase in new orders was predominantly the result of increasedsales in markets outside the Baltimore/Washington area.

Gross profit margins for 2000 increased to 19% compared to 17% for 1999.The increase in gross profit margins was due to continuing favorable marketconditions, which provided NVR the opportunity to increase selling prices incertain of its markets, a decrease in the cost of lumber and certain othermaterial costs and to NVR's ongoing focus of controlling construction costs.Gross profit margins for 1999 increased to 17% compared to 15% for 1998. Theincrease in gross profit margins was due to favorable market conditions thatexisted in the first half of 1999, which provided NVR the opportunity to




increase selling prices in certain of its markets during that time, and to NVR'scontinued emphasis on controlling construction costs. In addition, the Companyhas increased the sales and settlement pace per community, which resulted in abetter leverage of fixed costs.

SG&A expenses for 2000 increased $12,446 as compared to 1999, but as apercentage of revenues remained the same at 7%. The percentage decrease isprimarily attributable to improved operating efficiencies resulting from thecontinued favorable market conditions as explained above and the overall largerrevenue base. The increase in SG&A dollars is also primarily attributable tothe aforementioned increase in revenues. SG&A expenses for 1999 increased$27,433 as compared to 1998, but as a percentage of revenues decreased to 7% in1999 from 8% in 1998. Approximately $15,000 of the increase in SG&A expenses isdue to a net period to period increase for compensation cost attributable tomanagement incentive plans. The increase in SG&A dollars is also attributableto the aforementioned increase in revenues.

Backlog units and dollars were 5,148 and $1,318,277, respectively, atDecember 31, 2000 compared to backlog units of 4,935 and dollars of $1,137,332at December 31, 1999. The increase in backlog dollars and units was primarilydue to a 9% increase in new orders for the six-month period ended December 31,2000 compared to the same 1999 period. The dollar increase is also due to an 8%increase in the average selling price comparing the same six-month periods.Backlog units and dollars were 4,935 and $1,137,332,

9<PAGE>

respectively, at December 31, 1999 compared to backlog units of 4,573 anddollars of $958,757 at December 31, 1998. The increase in backlog dollars andunits was primarily due to a 2% increase in new orders for the six-month periodended December 31, 1999 compared to the same 1998 period, and to a slowerbacklog turn. The dollar increase is also due to an 8% increase in the averageselling price comparing the same six-month period.

Mortgage Banking Segment

The mortgage banking segment had operating income, excluding the amortizationof excess reorganization value and goodwill, of $3,853 for the year endedDecember 31, 2000 compared to operating income of $14,752 during 1999. Duringthe first quarter of 2000, NVR formulated a detailed plan to align its mortgagebanking operations to exclusively serve the Company's homebuilding customers.The plan specifically entailed the closure of all of the Company's retailoperations, including all of the retail branches acquired from the acquisitionof First Republic Mortgage Corporation ("First Republic") in March 1999. Thisaction was consistent with the Company's decision in December 1999 to exit thewholesale mortgage origination business. The restructuring plan wassubstantially completed during the second quarter of 2000.

As a result of the restructuring, the Company recorded a restructuring andasset impairment charge of $5,926 in the first quarter of 2000. A detail of thecosts comprising the total charge incurred in the first quarter is as follows:

Write off of First Republic goodwill $2,575 Noncancelable office and equipment leases 1,480 Asset impairments 1,362 Severance 509 ------ Total $5,926 ======

During 2000, approximately $863 in severance and lease costs were appliedagainst the restructuring reserve. In addition, during the third quarter theCompany reversed approximately $200 in restructuring reserves, primarily forunused severance costs. Approximately $930 of the restructuring accrualestablished at March 31, 2000, remains at December 31, 2000, and primarilyrelates to accrued lease costs.

Excluding the restructuring and impairment charges (net of reversals)




incurred during 2000, operating income was $9,579, a decrease of 35% from the$14,752 of operating income generated in 1999. This was primarily due to a 40%reduction in loan closings to $1,749,720 for 2000 compared to $2,911,865 in loanclosings for 1999.

Excluding the results of First Republic, the mortgage banking segmentgenerated operating income of $16,045 for the year ended December 31, 1999compared to operating income of $17,056 during the same period in 1998. Totalloan closings were $2,911,865 and $2,717,456 during the respective periods of1999 and 1998. Approximately $450,178 of the increased loan closing productionwas the result of loans originated by First Republic. Excluding the originationactivity of First Republic, loan origination activity for 1999 decreased 9%compared to 1998.

Mortgage banking fees in 1999 were $48,122 compared to $42,703 in 1998,representing an increase of $5,419, or 13%, from the overall 7% increase inloan closing volume. An increase in builder related and other retail loanorigination activity offset the sharp reduction in wholesale refinance activityexperienced by the Company during the second half of 1999. This shift inproduct mix had a favorable impact on mortgage banking fees. However, due toincreased price competition, the Company realized lower margins on the sale ofloans. The increased revenues were offset by higher general and administrativeexpenses primarily due to ongoing incremental overhead of First Republic and, toa lesser extent, costs incurred for the implementation of the Company's new loanorigination system. In response to declining market conditions, the Companycommenced a plan to close four of its mortgage origination branches and to exitthe wholesale origination business. As a result of the plan, the Companyaccrued approximately $650 in office closure expenses during the fourth quarterof 1999.

10<PAGE>

Seasonality

The results of NVR's homebuilding operations generally reflect theseasonality of the housing market in the Middle Atlantic region of the UnitedStates. NVR historically has entered into more sales contracts in this regionduring the first and second quarters. Because NVR's mortgage banking operationshave changed their strategic focus to exclusively serve the company'shomebuilding customers, to the extent that homebuilding is affected byseasonality, mortgage banking operations may also be affected.

Effective Tax Rate

The merger of NVR Homes, Inc. and NVR Financial Services, Inc. into NVR,Inc., on September 30, 1998 allowed NVR to utilize a separate return limitationyear net operating loss ("SRLY NOL") generated by NVR's previously owned savingsand loan institution, NVR Savings Bank. As a result, NVR realized a $3,300 taxbenefit during 1998. The use of the SRLY NOL, coupled with higher taxable incomerelative to fixed permanent differences, reduced NVR's 1998 effective tax rateto 40.1%. The 2000 and 1999 effective tax rates of 40.7% and 41.2%,respectively, remained low as compared to the pre-SRLY NOL 1998 effective taxrate due to higher taxable income relative to NVR's permanent differences,primarily the amortization of reorganization value in excess of amountsallocable to identifiable assets and non-deductible compensation.

Recent Accounting Pronouncements

The Financial Accounting Standards Board has issued Statement of FinancialAccounting Standards ("SFAS") No. 133, "Accounting for Derivative Instrumentsand Hedging Activities." SFAS No. 133 requires all derivatives to be recognizedas either assets or liabilities on the balance sheet and be measured at fairvalue. Depending on the hedge designation, changes in such fair value will berecognized in either other comprehensive income or current earnings on theincome statement. During June 1999, the FASB issued SFAS No. 137, and in June2000, the FASB issued SFAS No. 138, both of which provide additional guidanceand amendments to SFAS No. 133. SFAS No. 133, as amended, is now effective forfiscal years beginning after June 15, 2000, and is applicable to interim periodsin the initial year of adoption. The Company does not expect that adoption of




SFAS No. 133 on January 1, 2001 will have a material adverse affect on itsresults of operations or financial condition.

11<PAGE>

Liquidity and Capital Resources

NVR's homebuilding segment generally provides for its working capital cashrequirements using cash generated from operations and a short-term unsecuredworking capital revolving credit facility. The Facility expires on May 31, 2003,and bears interest at the election of NVR at i) the base rate of interestannounced by the Facility agent, or ii) 1.35% above the Eurodollar rate. TheFacility provides for borrowings of up to $60,000, subject to certain borrowingbase limitations. Up to approximately $24,000 of the Facility is currentlyavailable for issuance in the form of letters of credit of which $15,779 wasoutstanding at December 31, 2000. There were no direct borrowings outstandingunder the Facility as of December 31, 2000. At December 31, 2000, there were noborrowing base limitations reducing the amount available to NVR for borrowings.

NVR's mortgage banking segment provides for its mortgage origination andother operating activities using cash generated from operations as well asvarious short-term credit facilities. NVR Finance has available an annuallyrenewable mortgage warehouse facility with an aggregate borrowing limit of$100,000 to fund its mortgage origination activities, under which $53,190 wasoutstanding at December 31, 2000. The Mortgage Warehouse Revolving Creditagreement expires August 31, 2001. The interest rate under the MortgageWarehouse Revolving Credit agreement is either: (i) the London InterbankOffering Rate ("Libor") plus 1.25%, or (ii) 1.25% to the extent that NVR Financeprovides compensating balances and depending on the type of collateral. Theweighted average interest rate for amounts outstanding under the MortgageWarehouse Revolving Credit line was 3.3% during 2000. NVR Finance from time totime enters into various gestation and repurchase agreements. NVR Financecurrently has available an aggregate of $150,000 of borrowing capacity in suchuncommitted facilities. Amounts outstanding thereunder accrue interest atvarious rates tied to the Libor rate and are collateralized by gestationmortgage-backed securities and whole loans. The weighted average interest ratefor amounts outstanding under these uncommitted facilities was 6.7% during 2000.There were no amounts outstanding under such gestation and repurchase agreementsat December 31, 2000.

On January 20, 1998, NVR filed a shelf registration statement with theSecurities and Exchange Commission for the issuance of up to $400,000 of NVR'sdebt securities. The shelf registration statement was declared effective onFebruary 27, 1998 and provides that securities may be offered from time to timein one or more series, and in the form of senior or subordinated debt. As ofDecember 31, 2000, an aggregate principal balance of $255,000 was available forissuance under the shelf registration statement.

On April 14, 1998, NVR completed an offering under the shelf registrationstatement for $145,000 of senior notes due 2005 (the "New Notes"), resulting inaggregate net proceeds to NVR of approximately $142,800 after fees and expenses.The New Notes mature on June 1, 2005 and bear interest at 8%, payable semi-annually on June 1 and December 1 of each year, commencing June 1, 1998. The NewNotes are senior unsecured obligations of NVR, ranking equally in right ofpayment with NVR's other existing and future unsecured indebtedness. The netproceeds of the New Notes were used to extinguish other indebtedness of NVR, asdescribed below.

Through a tender offer commenced on April 21, 1998 and completed on May 18,1998, various open market purchases throughout 1998 and a contractual callexercised on December 1, 1998, NVR repurchased all of the $120,000 in aggregateprincipal then outstanding under the Company's 11% Senior Notes due 2003("Senior Notes"). The Senior Notes were retired upon purchase. The amount offunds expended to complete the Senior Note repurchase totaled $129,345,excluding accrued interest, and resulted in the recognition of an extraordinaryloss of $7,126, net of a $4,461 tax benefit, ($0.54 per diluted share) in theaccompanying 1998 consolidated income statements.

During 2000, NVR purchased, in the open market, an aggregate of $30,000 inprincipal amount of New Senior Notes. The New Senior Notes were purchased at




par, with no material gain or loss resulting from the transaction. There is anaggregate of $115,000 of New Senior Notes outstanding at December 31, 2000.

During December 1998, NVR exercised its option to purchase two officebuildings currently utilized by NVR for certain administrative functions of bothits homebuilding and mortgage banking segments,

12<PAGE>

thereby extinguishing NVR's obligations under the capital lease pertaining tothese buildings. NVR expended funds of $12,295, excluding accrued interest, toextinguish the capital lease obligation and recognized an extraordinary loss of$2,275, net of a $1,424 tax benefit, ($0.17 per diluted share) in theaccompanying 1998 consolidated income statements. During 1999, NVR sold bothbuildings to an unrelated third party and leased back one of the buildings underan operating lease for a five-year term expiring in 2004. There was no resultantmaterial gain or loss on the sale transaction.

NVR Finance's mortgage warehouse facility limits the ability of NVR Financeto transfer funds to NVR in the form of dividends, loans or advances. NVRFinance had net assets of $8,000 as of December 31, 2000, that were sorestricted.

As shown in NVR's consolidated statement of cash flows for the year endedDecember 31, 2000, NVR's operating activities provided cash of $193,706 for thisperiod. The cash was provided primarily by homebuilding operations and by theexcess of loan sale proceeds over cash expended to close mortgage loans withcustomers.

Net cash provided by investing activities was $12,133 for the year endedDecember 31, 2000. The primary source of cash was the proceeds from the sale ofmortgage servicing rights.

Net cash used for financing activities was $157,257 for the year endedDecember 31, 2000. Cash was primarily used for NVR's purchase of approximately945,000 shares of its common stock for an aggregate purchase price of $53,677,the extinguishment of $30,000 of the Company's New Senior Notes, and netrepayments under the mortgage banking credit lines of approximately $72,000.

On October 3, 2000, NVR reached agreement with a Shareholder to purchaseapproximately 780,000 shares of its common stock effective January 2, 2001 foran aggregate purchase price of approximately $65,000. The Shareholder is notaffiliated with NVR or its subsidiaries. At December 31, 2000, the forwardpurchase contract obligation is presented separately outside of equity in theaccompanying balance sheet as temporary equity.

On January 2, 2001, NVR settled the transaction with the Shareholder bytaking physical delivery of the shares for the agreed upon purchase price paidin cash. Of the approximately 780,000 shares settled, approximately 86,000shares were used for the Company's employer contribution to the Employee StockOwnership Plan for plan year 2000 and approximately 30,000 shares were used forthe Deferred Compensation Plan (see note 9). The remaining shares were retainedin treasury.

On February 27, 2001, NVR successfully completed a solicitation of consentsfrom holders of its New Notes to amend the Indenture governing the New Notes.The amendment to the Indenture provides for NVR to repurchase up to an aggregate$85 million of its Capital Stock in one or more open market and/or privatelynegotiated transactions through March 31, 2002. NVR will make a payment equal to4.5% of the principal amount of the New Notes to each holder of the New Noteswho provided a consent. NVR may, from time to time, repurchase additional sharesof its common stock, pursuant to repurchase authorizations by the Board ofDirectors and subject to the restrictions contained within NVR's debt agreements

NVR believes that internally generated cash and borrowings available undercredit facilities will be sufficient to satisfy near and longer term cashrequirements for working capital and debt service in both its homebuilding andmortgage banking operations.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk.




- -------- ----------------------------------------------------------

Market risk is the risk of loss arising from adverse changes in marketprices and interest rates. NVR's market risk arises from interest rate riskinherent in its financial instruments. Interest rate risk is the possibilitythat changes in interest rates will cause unfavorable changes in net income orin the value of interest rate-sensitive assets, liabilities and commitments.Lower interest rates tend to increase demand for mortgage loans for homepurchasers, while higher interest rates make it more difficult for potentialborrowers to purchase residential properties and to qualify for mortgage loans.NVR has no market rate sensitive instruments held for speculative or tradingpurposes.

13<PAGE>

NVR's mortgage banking segment is exposed to interest rate risk as itrelates to its lending activities. The mortgage banking segment originatesmortgage loans, which are generally sold through optional and mandatory forwarddelivery contracts into the secondary markets. Substantially all of the mortgagebanking segment's loan portfolio is held for sale and subject to forward salecommitments. NVR also sells substantially all the mortgage servicing rights inbulk sales at predetermined prices which significantly reduces the market riskassociated with these interest sensitive assets.

In the normal course of business, NVR also enters into contractualcommitments involving financial instruments with off-balance sheet risk. Thesefinancial instruments include commitments to extend mortgage loans to customersand forward contracts to sell mortgage-backed securities to broker/dealers.These instruments involve, to varying degrees, elements of market rate risk inexcess of the amounts recognized in the balance sheet. NVR enters intocontractual commitments to extend credit to buyers of single-family homes withfixed expiration dates. The commitments become effective when the borrowers"lock-in" a specified interest rate within time frames established by NVR. Allmortgagors are evaluated for credit worthiness prior to the extension of thecommitment. Market risk arises if interest rates move adversely between the timeof the "lock-in" of rates by the borrower and the sale date to a broker/dealer.This market risk is managed by entering into forward contracts (optional andmandatory) to deliver mortgage-backed securities and whole loans at specificprices and dates to broker/dealers and secondary market investors. NVR hasestablished policies governing which broker/dealers can be used to conduct theseactivities. Market risk with respect to forward contracts arises from changes inthe value of contractual positions due to fluctuations in interest rates. NVRlimits its exposure to market risk by monitoring differences between the totalof commitments to customers and loans held for sale and forward contracts withinvestors and broker/dealers.

There were mortgage loan commitments aggregating approximately $106,969outstanding at December 31, 2000, with a fair value at December 31, 2000 of$107,457 and open forward delivery contracts to sell loans to third partyinvestors aggregating approximately $135,306 at December 31, 2000, with a fairvalue at December 31, 2000 of $134,386.

NVR's homebuilding segment generates operating liquidity and acquirescapital assets through fixed-rate and variable-rate debt. The homebuildingsegment's primary variable-rate debt is a working capital revolving creditfacility that currently provides for unsecured borrowings up to $60,000, subjectto certain borrowing base limitations. The working capital credit facilityexpires May 31, 2003 and outstanding amounts bear interest at the election ofNVR, at (i) the base rate of interest announced by the working capital creditfacility agent or (ii) 1.35% above the Eurodollar Rate. The weighted averageinterest rates for the amounts outstanding under the Facility was 8% for 2000.There were no amounts outstanding under the working capital revolving creditfacility at December 31, 2000.

The following table represents contractual balances of NVR's on balancesheet financial instruments in dollars at the expected maturity dates, as wellas the fair values of those on balance sheet financial instruments, at December31, 2000. The expected maturity categories take into consideration historicaland anticipated prepayment speeds, as well as actual amortization of principaland does not take into consideration the reinvestment of cash or the refinancing




of existing indebtedness. Because NVR sells all of the mortgage loans itoriginates into the secondary markets, NVR has made the assumption that theportfolio of mortgage loans held for sale will mature in the first year.Consequently, outstanding warehouse borrowings and repurchase facilities arealso assumed to mature in the first year.

14<PAGE>

Maturities (000's) ------------------<TABLE><CAPTION>

Fair 2001 2002 2003 2004 2005 Thereafter Total Value ------- ---- ---- ---- ------- ---------- ------- -------<S> <C> <C> <C> <C> <C> <C> <C> <C>Mortgage banking segment- ------------------------Interest rate sensitive assets: Mortgage loans held for sale 120,999 - - - - - 120,999 122,441 Average interest rate 7.9% - - - - - 7.9%

Interest rate sensitive liabilities: Variable rate warehouse line of credit 53,190 - - - - - 53,190 53,190Average interest rate (a) 3.3% - - - - - 3.3% Variable rate repurchase agreements - - - - - - - - Average interest rate - - - - - - - Fixed rate capital lease obligations 99 106 93 - - - 298 298 Average interest rate 6.4% 6.4% 6.4% - - - 6.4%

Homebuilding segment- --------------------Interest rate sensitive assets: Interest-bearing deposits 85,000 - - - - - 85,000 85,000 Average interest rate 6.3% - - - - - 6.3%

Interest rate sensitive liabilities: Variable rate working capital line of credit - - - - - - - - Average interest rate - - - - - - -Fixed rate obligations (b) 470 303 331 385 115,333 3,345 120,167 116,717 Average interest rate 8.2% 8.2% 8.2% 8.2% 8.3% 13.1% 8.3%

</TABLE>(a) Average interest rate is net of credits received for compensating cash balances.(b) The $115,333 maturing during 2005 includes $115,000 of the Company's 8% Senior Notes due June 2005.

15<PAGE>

Item 8. Financial Statements and Supplementary Data.- ------- --------------------------------------------

The financial statements required by this Item are included in thefinancial statements and schedules included herein under Item 14 and are




incorporated herein by reference.

Item 9. Changes in and Disagreements with Accountants on Accounting and- ------- --------------------------------------------------------------- Financial Disclosure. ---------------------

Not applicable.

PART III --------

Item 10. Directors and Executive Officers of the Registrant.- -------- ---------------------------------------------------

Item 10 is hereby incorporated by reference to NVR's Proxy Statementexpected to be filed with the Securities and Exchange Commission on or prior toApril 30, 2001. Reference is also made regarding the executive officers of theregistrant to "Executive Officers of the Registrant" following Item 4 of Part Iof this report.

Item 11. Executive Compensation.- -------- -----------------------

Item 11 is hereby incorporated by reference to NVR's Proxy Statementexpected to be filed with the Securities and Exchange Commission on or prior toApril 30, 2001.

Item 12. Security Ownership of Certain Beneficial Owners and Management.- -------- ---------------------------------------------------------------


Item 13. Certain Relationships and Related Transactions.- -------- -----------------------------------------------


PART IV -------

Item 14. Exhibits and Reports on Form 8-K.- -------- ---------------------------------

Financial Statements NVR, Inc. - Consolidated Financial Statements Report of Independent Auditors Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Shareholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements

Description of Exhibits

Exhibit Number Description ------ ---------------- 2.1 Debtors' Second Amended Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code (as modified to July 21, 1993). Incorporated by reference to Exhibit 2.1 in NVR, Inc.'s 1993 Registration Statement on Form S-1 (No. 33-63190) (the "1993 Registration Statement").

3.1 Restated Articles of Incorporation of NVR, Inc. Incorporated by reference to Exhibit 3.7 in NVR, Inc.'s 1993 Registration




Statement.

3.2 Bylaws of NVR, Inc. Incorporated by reference to Exhibit 3.8 in NVR, Inc.'s 1993 Registration Statement.

4.1 Form of Trust Indenture between NVR, Inc., as issuer and the Bank of New York as trustee. Incorporated by reference to Exhibit 4.3 in NVR, Inc.'s Current Report on Form 8-K filed April 23, 1998.

4.2 Form of Note (included in Indenture filed as Exhibit 4.1).

4.4 Form of Supplemental Trust Indenture between NVR, Inc., as issuer, NVR Homes, Inc., as guarantor, and The Bank of New York, as trustee. Incorporated by reference to Exhibit 4.3 in NVR, Inc.'s Current Report on Form 8-K filed April 23, 1998.

*4.5 Second Supplemental Indenture between NVR, Inc. and the Bank of New York, as trustee dated February 27, 2001.

10.1 Employment Agreement between NVR, Inc. and Dwight C. Schar dated January 1, 1996. Incorporated by reference to Exhibit 10.1 in NVR Inc.'s 10-K for the year ended December 31, 1995.

*10.3 Executive Employment Agreement between NVR, Inc. and Paul C. Saville dated January 1, 2001.

10.5 Employment Agreement between NVR, Inc. and William J. Inman dated November 13, 1995. Incorporated by reference to Exhibit 10.5 in NVR Inc.'s 10-K for the year ended December 31, 1995.

10.6 Loan Agreement dated as of September 7, 1999 among NVR Mortgage Finance, Inc. and US Bank National Association., as Agent, and the other lenders party thereto. Incorporated by reference to Exhibit 10.6 in NVR, Inc.'s 10-K for the year ended December 31, 1999.

10.7 NVR, Inc. Equity Purchase Plan. Incorporated by reference to Exhibit 10.10 in NVR, Inc.'s 1993 Registration Statement.

17<PAGE>

10.8 NVR, Inc. Directors Long-Term Incentive Plan. Incorporated by reference to Exhibit 10.11 in NVR, Inc.'s 1993 Registration Statement.

10.9 NVR, Inc. Management Equity Incentive Plan. Incorporated by reference to Exhibit 10.2 in NVR, Inc.'s 1993 Registration Statement.

10.19 Employee Stock Ownership Plan of NVR, Inc. Incorporated by reference to NVR, Inc.'s 10-KA for the year ended December 31, 1994.

10.22 NVR, Inc. 1994 Management Equity Incentive Plan. Incorporated by reference to NVR, Inc.'s 10-K for the year ended December 31, 1994.

10.23 NVR, Inc. 1998 Management Long-Term Stock Option Plan. Incorporated by reference to Exhibit 4 of NVR, Inc.'s Form S-8 Registration Statement filed June 4, 1999.

10.24 NVR, Inc. 1998 Directors' Long-Term Stock Option Plan. Incorporated by reference to Exhibit 4 of NVR, Inc.'s Form S-8 Registration Statement filed June 4, 1999.

10.26 NVR, Inc. Management Long-Term Stock Option Plan. Incorporated by reference to Exhibit 99.3 of NVR, Inc.'s Form S-8 Registration Statement filed May 31, 1996.

10.27 NVR, Inc. Directors' Long-Term Stock Option Plan. Incorporated by reference to Exhibit 99.3 of NVR, Inc.'s Form S-8 Registration




Statement filed May 31, 1996.

10.29 Third Amended and Restated Credit Agreement dated as of September 30, 1998 among NVR, Inc. as borrower and Certain Banks and BankBoston, as Agent for itself and Certain Banks. Incorporated by reference to Exhibit 10.29 in NVR, Inc.'s 10-K for the year ended December 31, 1998

10.30 NVR, Inc. High Performance Compensation Plan dated as of January 1, 1996. Incorporated by reference to Exhibit 10.30 in NVR, Inc.'s 10- K for the year ended December 31, 1996.

10.31 NVR, Inc. High Performance Compensation Plan No. 2 dated as of January 1, 1999. Incorporated by reference to Exhibit 10.31 in NVR, Inc.'s 10-K for the year ended December 31, 1998.

10.34 Mortgage Loan Purchase and Sale Agreement between Greenwich Capital Financial Products, Inc. and NVR Mortgage Finance, Inc., dated as of July 22, 1998. Incorporated by reference to Exhibit 10.34 in NVR, Inc.'s 10-K for the year ended December 31, 1998.

*10.35 Master Repurchase Agreement between Bear Stearns Mortgage Capital Corporation and NVR Mortgage Finance, Inc. dated January 9, 2001.

*10.36 Second Amendment to Loan Agreement and Second Amendment to Pledge and Security Agreement dated September 1, 2000 between NVR Mortgage Finance, Inc. and U.S. Bank National Association, as agent, and other Lenders party thereto.

*10.37 Amendment No. 4 to Third Amended and restated Credit Agreement dated as of September 30, 1998 by and among NVR, inc., as borrower, Fleet National Bank, successor by merger to Bank Boston, NA, and Certain Banks.

*11 Computation of Earnings per Share

*21 NVR, Inc. Subsidiaries.

*23 Consent of KPMG LLP (independent auditors).

* Filed herewith._________________

18<PAGE>

Reports on Form 8-K

1) Form 8-K filed October 26, 2000 announcing the solicitation of consents from holders of NVR's 8% Senior Notes (The "Notes") due 2005 to amend the indenture governing the Notes.

2) Form 8-K filed November 14, 2000 announcing NVR's extension of the expiration date for its consent solicitation relating to the Notes, and announcing an increase to the consent payment to $40 in cash for each $1,000 principal amount of Notes for which a consent has been accepted.

19<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized.

NVR, Inc.




By: /s/ Dwight C. Schar ------------------- Dwight C. Schar Chairman of the Board of Directors, President and Chief Executive Officer

Dated: March 7, 2001 -------------

Pursuant to the requirements of the Securities Exchange Act of 1934, thisreport has been signed by the following persons on behalf of the registrant andin the capacities and on the dates indicated.

Signature Title Date --------- ----- ----

Chairman of the Board of Directors, President and/s/ Dwight C. Schar Chief Executive Officer- ----------------------------Dwight C. Schar (Principal Executive Officer) March 7, 2001

/s/ C. Scott Bartlett, Jr. Director- ----------------------------C. Scott Bartlett, Jr. March 7, 2001

/s/ Manuel H Johnson Director- ----------------------------Manuel H. Johnson March 7, 2001

/s/ William A. Moran Director- ----------------------------William A. Moran March 7, 2001

/s/ David A. Preiser Director- ----------------------------David A. Preiser March 7, 2001

/s/ George E. Slye Director- ----------------------------George E. Slye March 7, 2001

/s/ John M. Toups Director- ----------------------------John M. Toups March 7, 2001

Senior Vice President, Chief Financial Officer and/s/ Paul C. Saville Treasurer March 7, 2001- ----------------------------Paul C. Saville

Independent Auditors' Report ----------------------------

The Board of Directors and ShareholdersNVR, Inc.:

We have audited the accompanying consolidated balance sheets of NVR, Inc. andsubsidiaries as of December 31, 2000 and 1999 and the related consolidatedstatements of income, shareholders' equity, and cash flows for each of the yearsin the three-year period ended December 31, 2000. These consolidated financialstatements are the responsibility of the Company's management. Ourresponsibility is to express an opinion on these consolidated financial




statements based on our audits.

We conducted our audits in accordance with auditing standards generally acceptedin the United States of America. Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of NVR, Inc. andsubsidiaries as of December 31, 2000 and 1999 and the results of theiroperations and their cash flows for each of the years in the three-year periodended December 31, 2000, in conformity with accounting principles generallyaccepted in the United States of America.

KPMG LLP

McLean, VirginiaJanuary 30, 2001




NVR, Inc. Consolidated Balance Sheets (dollars in thousands, except share data) December 31, ------------------ 2000 1999 -------- -------- ASSETS Homebuilding: Cash and cash equivalents $130,079 $ 77,968 Receivables 6,670 2,171 Inventory: Lots and housing units, covered under sales agreements with customers 294,094 276,193 Unsold lots and housing units 32,600 37,573 Manufacturing materials and other 7,987 9,689 -------- -------- 334,681 323,455

Property, plant and equipment, net 13,514 13,114 Reorganization value in excess of amounts allocable to identifiable assets, net 47,741 53,901 Goodwill, net 7,472 8,566 Contract land deposits 96,119 62,784 Deferred tax assets 43,844 36,819 Other assets 17,366 12,957 -------- --------

697,486 591,735 -------- --------

Mortgage Banking: Cash and cash equivalents 7,629 11,158 Mortgage loans held for sale, net 120,999 136,311 Mortgage servicing rights, net 1,479 3,384 Property and equipment, net 2,351 4,239 Reorganization value in excess of amounts allocable to identifiable assets, net 8,435 9,523 Goodwill, net - 2,739 Other assets 2,881 8,192 -------- --------

143,774 175,546 -------- -------- Total assets $841,260 $767,281 ======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY Homebuilding: Accounts payable $ 108,064 $ 98,322 Accrued expenses and other liabilities 173,787 125,172 Customer deposits 63,486 50,348 Notes payable 210 2,128 Other term debt 4,957 5,206 Senior notes 115,000 145,000 --------- --------- 465,504 426,176 --------- --------- Mortgage Banking: Accounts payable and other liabilities 9,760 14,666 Notes payable 53,488 125,799 --------- --------- 63,248 140,465 --------- --------- Total liabilities 528,752 566,641




--------- --------- Forward purchase contract obligation 65,028 -

Commitments and contingencies

Shareholders' equity: Common stock, $0.01 par value; 60,000,000 shares authorized; 20,614,365 and 20,614,855 shares issued for 2000 and 1999, respectively 206 206 Additional paid-in-capital 115,136 196,652 Deferred compensation trust- 337,703 shares of NVR, Inc. common stock (15,915) - Deferred compensation liability 15,915 - Retained earnings 399,810 241,564 Less treasury stock at cost - 11,755,671 and 11,443,247 shares at December 31, 2000 and 1999, respectively (267,672) (237,782) --------- --------- Total shareholders' equity 247,480 200,640 --------- ---------Tot. liab. and shareholders'equity $ 841,260 $ 767,281 ========= ========= NVR, Inc. Consolidated Statements of Income (dollars in thousands, except share data)

<TABLE><CAPTION> Year Ended Year Ended Year Ended December 31, 2000 December 31, 1999 December 31, 1998 ------------------ ------------------ ------------------<S> <C> <C> <C>Homebuilding: Revenues $ 2,267,810 $ 1,942,660 $ 1,504,744 Other income 3,578 1,712 1,874 Cost of sales (1,834,059) (1,610,727) (1,273,815) Selling, general and administrative (153,208) (140,762) (113,329) Amortization of reorganization value in excess of amounts allocable to identifiable assets/goodwill (7,254) (7,254) (7,547) ----------- ----------- ----------- Operating income 276,867 185,629 111,927 Interest expense (12,614) (13,533) (17,528) ----------- ----------- ----------- Homebuilding income 264,253 172,096 94,399 ----------- ----------- -----------Mortgage Banking: Mortgage banking fees 38,757 48,122 42,703 Interest income 6,541 13,556 9,861 Other income 534 598 634 General and administrative (33,237) (40,020) (30,022) Amortization of reorganization value in excess of amounts allocable to identifiable assets/goodwill (1,252) (1,636) (1,088) Interest expense (3,016) (7,504) (6,120) Restructuring and asset impairment charge (5,726) - - ----------- ----------- ----------- Operating income 2,601 13,116 15,968 ----------- ----------- -----------

Total segment income 266,854 185,212 110,367

Income tax expense (108,608) (76,331) (44,260) ----------- ----------- -----------Income before extraordinary loss 158,246 108,881 66,107Extraordinary loss-extinguishment of debt (net of tax benefit of $5,885) - - (9,401) ----------- ----------- -----------Net income $ 158,246 $ 108,881 $ 56,706




=========== =========== ===========Basic earnings per share: Income before extraordinary loss $ 17.42 $ 10.69 $ 5.94 Extraordinary loss - - (0.84) ----------- ----------- ----------- Basic earnings per share $ 17.42 $ 10.69 $ 5.10 =========== =========== ===========Diluted earnings per share: Income before extraordinary loss $ 14.98 $ 9.01 $ 4.97 Extraordinary loss - - (0.71) ----------- ----------- ----------- Diluted earnings per share $ 14.98 $ 9.01 $ 4.26 =========== =========== ===========</TABLE>

See notes to consolidated financial statements.

24<PAGE>

NVR, Inc. Consolidated Statements of Shareholders' Equity (dollars in thousands)

<TABLE><CAPTION> Additional Deferred Deferred Common Paid-in Retained Treasury Compensation Compensation Stock Capital Earnings Stock Trust Liabilitiy ------ ----------- -------- ---------- ------------- ------------<S> <C> <C> <C> <C> <C> <C>

Balance, December 31, 1997 $200 $164,731 $ 75,977 $ (96,268) $ - $ -

Net income - - 56,706 - - - Purchase of common stock for treasury - - - (50,199) - - Performance share activity - 3,953 - 5,128 - - Tax benefit from stock options exercised - 3,744 - - - - Option activity 2 1,745 - - - - ------ -------- -------- --------- ------------ ------------Balance, December 31, 1998 202 174,173 132,683 (141,339) - -

Net income - - 108,881 - - - Purchase of common stock for treasury - - - (101,765) - - Performance share activity - 13,412 - 5,322 - - Tax benefit from stock options exercised - 7,542 - - - - Option activity 4 1,525 - - - - ------ -------- -------- --------- ------------ ------------Balance, December 31, 1999 206 196,652 241,564 (237,782) - -

Net income - - 158,246 - - - Deferred compensation activity - (14,918) - 14,451 (15,915) 15,915 Purchase of common stock for treasury - - - (53,677) - - Performance share activity - (3,595) - 3,674 - - Tax benefit from stock options exercised - 4,628 - - - - Option activity - 3,059 - - - - Treasury stock issued upon option exercise - (5,662) - 5,662 - - Forward purchase contract obligation - (65,028) - - - - ------ -------- -------- --------- ------------ ------------Balance, December 31, 2000 $206 $115,136 $399,810 $(267,672) $(15,915) $15,915 ====== ======== ======== ========= ============ ============</TABLE>




See notes to consolidated financial statements

25<PAGE>

NVR, Inc. Consolidated Statements of Cash Flows (dollars in thousands)<TABLE><CAPTION> Year Ended Year Ended Year Ended December 31, 2000 December 31, 1999 December 31, 1998 ------------------ ------------------ ------------------<S> Cash flows from operating activities:

Net income $ 158,246 $ 108,881 $ 56,706 Adjustments to reconcile net income to net cash provided (used) by operating activities: Extraordinary loss - extinguishment of debt - - 15,286 Depreciation and amortization 13,840 14,727 13,408 Restructuring and asset impairment charge 5,726 - - Gain on sales of loans (25,512) (33,807) (31,071) Deferred tax provision (6,983) (11,911) (10,927) Mortgage loans closed (1,749,720) (2,911,865) (2,717,456) Proceeds from sales of mortgage loans 1,776,595 3,027,057 2,655,949 Gain on sales of mortgage servicing rights (756) (2,962) (1,368) Net change in assets and liabilities, net of acquisitions: Increase in inventories (11,226) (34,817) (64,597) Increase in contract land deposits (33,335) (22,085) (3,707) (Increase) decrease in receivables (2,638) (2,517) 2,601 Increase in accounts payable and accrued expenses 71,495 57,450 68,815 Other, net (2,026) 27,202 4,710 ----------- ----------- -----------

Net cash provided (used) by operating activities 193,706 215,353 (11,651) ----------- ----------- -----------Cash flows from investing activities:

Proceeds from sales of mortgage-backed securities - - 9,569 Business acquisition, net of cash acquired - (3,697) - Purchase of property, plant and equipment (5,027) (9,070) (3,964) Principal payments on mortgage-backed securities 826 1,765 5,076 Proceeds from sales of mortgage servicing rights 15,762 31,647 27,637 Other, net 572 5,450 1,266 ----------- ----------- -----------

Net cash provided by investing activities 12,133 26,095 39,584 ----------- ----------- -----------Cash flows from financing activities:

Redemption of mortgage-backed bonds (817) (2,300) (13,341) Extinguishment of 11% senior notes - - (129,344) Deferred financing fees - - (2,311) Issuance of 8% senior notes - - 145,000 Extinguishment of 8% senior notes (30,000) - - Purchases of treasury stock (53,677) (101,765) (50,199) Purchase of NVR common stock for deferred comp plan (1,606) - - Net borrowings (repayments) under notes payable and credit lines (74,217) (118,290) 43,294 Other, net 3,060 1,529 1,747 ----------- ----------- ----------- Net cash used by financing activities (157,257 ) (220,826) (5,154) ----------- ----------- -----------Net increase in cash 48,582 20,622 22,779 Cash, beginning of year 89,126 68,504 45,725 ----------- ----------- ----------- $ 137,708 $ 89,126 $ 68,504 =========== =========== ===========




Supplemental disclosures of cash flow information:

Interest paid during the year $ 15,858 $ 21,115 $ 24,670 =========== =========== =========== Inc. taxes paid during the year, net of refunds $ 102,694 $ 78,493 $ 43,097 =========== =========== ===========

See notes to consolidated financial statements. NVR, Inc. Notes to Consolidated Financial statements (dollars in thousands, except per share data)

1. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of NVR, Inc. ("NVR" or the "Company"), its wholly owned subsidiaries and certain partially owned entities. All significant intercompany transactions have been eliminated in consolidation.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include short-term investments with original maturities of three months or less.

Homebuilding Inventory

Inventory is stated at the lower of cost or market value. Cost of lots and completed and uncompleted housing units represent the accumulated actual cost thereof. Field construction supervisors' salaries and related direct overhead expenses are included in inventory costs. Interest costs are not capitalized into inventory. Upon settlement, the cost of the units is expensed on a specific identification basis. Cost of manufacturing materials is determined on a first-in, first-out basis.

Reorganization Value in Excess of Amounts Allocable to Identifiable Assets

Reorganization value in excess of amounts allocable to identifiable assets is being amortized on a straight-line basis over 15 years. Accumulated amortization as of December 31, 2000 and 1999 was $56,526 and $49,278, respectively. Determination of any impairment losses related to this intangible asset is based on consideration of projected undiscounted cash flows.

Goodwill

The excess of amounts paid for business acquisitions over the net fair value of the assets acquired and the liabilities assumed is amortized using the straight line method ranging from five to ten years. Accumulated amortization was $3,464 and $2,918 at December 31, 2000 and 1999, respectively. During 2000, as part of the mortgage banking segment's restructuring plan, NVR wrote off $2,575 of goodwill remaining from the acquisition in March 1999 of First Republic Mortgage Corporation ("First Republic") (See note 12). Determination of any impairment losses related to this intangible asset is based on consideration of projected undiscounted cash flows.

Mortgage Loans Held for Sale




Mortgage loans held for sale, forward trade commitments and origination commitments are valued at the lower of cost or market on a net aggregate basis.

27<PAGE>

NVR, Inc. Notes to Consolidated Financial statements (dollars in thousands, except per share data)

Mortgage-Backed Securities and Mortgage-Backed Bonds

The Company's consolidated balance sheets for all periods presented reflect its ownership interests in mortgage-backed securities net of the related mortgage-backed bonds as a component of other assets of the mortgage banking segment, and the consolidated statements of income for all periods presented reflect earnings from such interests net of the related interest expense as a component of other income of the mortgage banking segment. All of such interests are at, or are nearing, the end of their economic useful lives, and as such, NVR does not anticipate that such assets will generate significant amounts of income or cash flow in the future. See note 11 for additional information.

Earnings per Share

The following weighted average shares and share equivalents are used to calculate basic and diluted EPS for the years ended December 31, 2000, 1999 and 1998:

<TABLE><CAPTION> Year Ended Year Ended Year Ended December 31, 2000 December 31, 1999 December 31, 1998 ----------------- ----------------- -----------------Weighted average number ofshares outstanding used tocalculate basic EPS 9,084,041 10,189,878 11,131,114

Dilutive securities:Stock options and forwardpurchase contract obligation 1,480,174 1,898,510 2,168,950 ----------------- ----------------- -----------------

Weighted average number of shares and share equivalents outstanding used to calculate diluted EPS 10,564,215 12,088,388 13,300,064 ================= ================= =================</TABLE>

Subsequent to December 31, 2000, NVR settled a forward purchase contract obligation in NVR common stock through a physical settlement of the shares. See note 7.

Revenues-Homebuilding Operations

NVR builds light-frame, low-rise residences which generally are produced on a pre-sold basis for the ultimate customer. Revenues are recognized at the time units are completed and title passes to the customer.

Mortgage Banking Fees

Mortgage banking fees include income earned by NVR's mortgage banking subsidiaries for originating mortgage loans, servicing mortgage loans held in the servicing portfolio, title fees, gains and losses on the sale of mortgage loans and mortgage servicing and other activities incidental to mortgage banking.




28<PAGE>


Mortgage Servicing Rights

Mortgage servicing rights are recorded by allocating the total cost of acquiring mortgage loans to the mortgage servicing rights and the loans (without the mortgage servicing rights) based on their relative fair values.

NVR measures the impairment of the mortgage servicing rights based on the lower of cost or fair value. Current fair value is determined through the discounted present value of estimated future net servicing cash flows using a risk-based discount rate and assumptions based upon market estimates for future servicing revenues and expenses (including prepayment expectations, servicing costs, default rates, and interest earnings on escrows). For the purposes of evaluating and measuring impairment of the mortgage servicing rights, they are stratified using the predominant risk characteristic of the underlying mortgage loans. NVR has determined that the predominant risk characteristic of the underlying mortgage loans is interest rate. Impairment, and subsequent changes in measurement of impairment, of any individual stratum is recognized through a valuation allowance for that stratum. The mortgage servicing rights are amortized to general and administrative expense in proportion to, and over the period of, the estimated net servicing income.

Depreciation

Depreciation is based on the estimated useful lives of the assets using the straight-line method. Amortization of capital lease assets is included in depreciation expense. Model home furniture and fixtures are generally depreciated over a two year period, office facilities and other equipment are depreciated over a period from three to ten years, manufacturing facilities are depreciated over a period of from five to forty years and property under capital lease is depreciated in a manner consistent with the Company's depreciation policy for owned assets.

Income Taxes

NVR files a consolidated federal income tax return. Deferred income taxes reflect the impact of "temporary differences" between the amounts of assets and liabilities for financial reporting purposes and such amounts as measured by enacted tax rules and regulations.

Financial Instruments

Except as otherwise noted here and note 4 to the financial statements, NVR believes that insignificant differences exist between the carrying value and the fair value of its financial instruments. The estimated fair value of NVR's 8% Senior Notes due 2005 as of December 31, 2000 and 1999 was $111,550 and $136,663, respectively. The estimated fair values are based on quoted market prices. The carrying value was $115,000 and $145,000 at December 31, 2000 and 1999, respectively.

Stock-Based Compensation

As permitted under SFAS No. 123, NVR has elected to continue to follow the guidance of Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25, in accounting for its stock-based employee compensation arrangements. The pro forma financial information required by SFAS No. 123 is included in note 9.

29<PAGE>





2. Segment Information, Nature of Operations, and Certain Concentrations

NVR operates in two business segments: homebuilding and mortgage banking.The homebuilding segment is one of the largest homebuilders in the United Statesand in the Washington, D.C. and Baltimore, Maryland metropolitan areas, whereNVR derived approximately 61% of its 2000 homebuilding revenues. NVR'shomebuilding segment primarily constructs and sells single-family detachedhomes, townhomes and condominium buildings under three tradenames: Ryan Homes,NVHomes and Fox Ridge Homes. The Ryan Homes product is built in eighteenmetropolitan areas located in Maryland, Virginia, Pennsylvania, New York, NorthCarolina, South Carolina, Ohio, New Jersey, Delaware and Tennessee. The FoxRidge Homes product is built solely in the Nashville, Tennessee metropolitanarea. The Ryan Homes' and Fox Ridge Homes' products are moderately priced andmarketed primarily towards first-time and first time move-up buyers. TheNVHomes product is built largely in the Washington, D.C. metropolitan area, andis marketed primarily to move-up buyers.

The mortgage banking segment, which operates under NVR Finance, currentlyincludes a regional mortgage banking operation and a limited-purpose financingsubsidiary (the "Limited-Purpose Financing Subsidiary") which was formed tofacilitate the financing of long-term mortgage loans through the sale of non-recourse bonds collateralized by mortgage-backed securities. NVR's mortgagebanking business generates revenues primarily from origination fees, gains onsales of loans, title fees, and sales of servicing rights. A substantialportion of the Company's mortgage operations is conducted in the Washington, D.Cand Baltimore, MD metropolitan areas. NVR's homebuilding customers accountedfor 71% of the aggregate dollar amount of loans closed in 2000. Based on NVR'sbusiness restructuring, substantially all of the mortgage banking segment'songoing loan closing activity will be for NVR's homebuilding customers (See note12).

Corporate general and administrative expenses are fully allocated to thehomebuilding and mortgage banking segments in the information presented below.

<TABLE><CAPTION>For the Year Ended December 31, 2000- -------------------------------------- Homebuilding Mortgage Banking Totals ------------ ---------------- ----------<S> <C> <C> <C>Revenues $2,267,810 $ 38,757 $2,306,567 (a)Interest income 2,233 6,541 8,774 (a)Interest expense 12,614 3,016 15,630 (a)Depreciation and amortization 4,693 641 5,334 (b)Segment profit 271,507 3,853 275,360 (b)Segment assets 642,273 135,339 777,612 (b)Expenditures for segment assets 4,824 203 5,027 (a)</TABLE>(a) Total amounts for the reportable segments equal the respective amounts for the consolidated enterprise.(b) The following reconciles segment profit and segment assets to the respective amounts for the consolidated enterprise:

<TABLE><CAPTION> Homebuilding Mortgage Banking Totals ------------- ----------------- ---------<S> <C> <C> <C>Segment depreciation and amortization $ 4,693 $ 641 $ 5,334Add: amortization of excess reorganization value and goodwill 7,254 1,252 8,506 -------- ---------------- --------Consolidated depreciation and




amortization $ 11,947 $ 1,893 $ 13,840 ======== ================ ========

Segment profit $271,507 $ 3,853 $275,360Less: amortization of excess reorganization value and goodwill (7,254) (1,252) (8,506) -------- ---------------- --------Consolidated income before income taxes $264,253 $ 2,601 $266,854 ======== ================ ========</TABLE>

30<PAGE>


<TABLE><CAPTION> Homebuilding Mortgage Banking Totals ------------ ---------------- ----------<S> <C> <C> <C>Segment assets $ 642,273 $ 135,339 $ 777,612Add: Excess reorganization value and goodwill 55,213 8,435 63,648 ---------- --------------- ----------Total consolidated assets $ 697,486 $ 143,774 $ 841,260 ========== =============== ==========

For the Year Ended December 31, 1999- ------------------------------------ Homebuilding Mortgage Banking Totals ------------ ---------------- ----------Revenues $1,942,660 $ 48,122 $1,990,782 (c)Interest income 141 13,556 13,697 (c)Interest expense 13,533 7,504 21,037 (c)Depreciation and amortization 3,775 2,062 5,837 (d)Segment profit 179,350 14,752 194,102 (d)Segment assets 529,268 163,284 692,552 (d)Expenditures for segment assets 6,465 2,605 9,070 (c)</TABLE>

(c) Total amounts for the reportable segments equal the respective amounts for the consolidated enterprise.(d) The following reconciles segment profit and segment assets to the respective amounts for the consolidated enterprise:

<TABLE><CAPTION> Homebuilding Mortgage Banking Totals ------------- ----------------- -----------<S> <C> <C> <C>Segment depreciation and amortization $ 3,775 $ 2,062 $ 5,837Add: amortization of excess reorganization value and goodwill 7,254 1,636 8,890 ---------- -------------- ----------Consolidated depreciation and amortization $ 11,029 $ 3,698 $ 14,727 ========== ============== ==========

Segment profit $ 179,350 $ 14,752 $ 194,102Less: amortization of excess reorganization value and goodwill (7,254) (1,636) (8,890) ---------- -------------- ----------Consolidated income before income taxes and extraordinary loss $ 172,096 $ 13,116 $ 185,212 ========== ============== ==========




Segment assets $ 529,268 $ 163,284 $ 692,552Add: Excess reorganization value and goodwill 62,467 12,262 74,729 ---------- -------------- ----------Total consolidated assets $ 591,735 $ 175,546 $ 767,281 ========== ============== ==========

For the Year Ended December 31, 1998- ------------------------------------ Homebuilding Mortgage Banking Totals ------------ ---------------- ----------Revenues $1,504,744 $ 42,703 $1,547,447 (e)Interest income 1,256 9,861 11,117 (e)Interest expense 17,528 6,120 23,648 (e)Depreciation and amortization 4,166 607 4,773 (f)Segment profit 101,946 17,056 119,002 (f)Segment assets 447,934 196,093 644,027 (f)Expenditures for segment assets 3,007 957 3,964 (e)</TABLE>

(e) Total amounts for the reportable segments equal the respective amounts for the consolidated enterprise.

31<PAGE>


(f) The following reconciles segment profit and segment assets to the respective amounts for the consolidated enterprise:

<TABLE><CAPTION> Homebuilding Mortgage Banking Totals ------------- ----------------- ---------<S> <C> <C> <C>Segment depreciation and amortization $ 4,166 $ 607 $ 4,773Add: amortization of excess reorganization value and goodwill 7,547 1,088 8,635 -------- -------------- --------Consolidated depreciation and amortization $ 11,713 $ 1,695 $ 13,408 ======== ============== ========

Segment profit $101,946 $ 17,056 $119,002Less: amortization of excess reorganization value and goodwill (7,547) (1,088) (8,635) -------- -------------- --------Consolidated income before income taxes and extraordinary loss $ 94,399 $ 15,968 $110,367 ======== ============== ========

Segment assets $447,934 $ 196,093 $644,027Add: Excess reorganization value and goodwill 69,721 10,611 80,332 -------- -------------- --------Total consolidated assets $517,655 $ 206,704 $724,359 ======== ============== ======== </TABLE>

3. Related Party Transactions

During 2000, 1999, and 1998, NVR purchased, at market prices, developedlots from a company that is controlled by a member of the board of directors.Those purchases totaled approximately $25,000, $19,000 and $13,000 during 2000,1999 and 1998, respectively. NVR expects to purchase the majority of the




remaining lots under contract as of December 31, 2000 over the next 18 to 24months for an aggregate purchase price of approximately $29,000.

During the years ended December 31, 2000, 1999 and 1998, one of theexecutive officers of NVR was a partner in a law firm, which billed NVRapproximately $560, $471 and $441, respectively, in fees and expenses for legalservices.

4. Loan Servicing Portfolio, Mortgage Loan Commitments and Off-Balance SheetRisk

At December 31, 2000 and 1999, NVR was servicing approximately 3,000 and2,700 mortgage loans for various investors with aggregate balances ofapproximately $275,000 and $222,000, respectively.

At December 31, 2000, NVR had net capitalized mortgage servicing rights of$1,479 which related to approximately $142,000 of the aggregate $275,000 inloans serviced. The mortgage servicing rights associated with the remaining$133,000 in loans serviced are not subject to capitalization because the loanswere originated and sold prior to NVR's adoption of SFAS No. 122 on January 1,1995.

NVR assesses the fair value of the capitalized mortgage servicing rights bystratifying the underlying loans by interest rate. The fair value of themortgage servicing rights is then determined through the present value ofestimated future net servicing cash flows using a risk based discount rate, andassumptions based upon market estimates for future servicing revenues andexpenses (including prepayment expectations, servicing costs, default rates, andinterest earnings on escrows). The fair value of the capitalized mortgageservicing rights approximated its book value at December 31, 2000 and 1999,respectively.

NVR amortizes the capitalized mortgage servicing rights in proportion to,and over the period of, the estimated net servicing income. The amortizationfor the periods ending December 31, 2000, 1999 and 1998

32<PAGE>


was $260, $306 and $484, respectively.

In the normal course of business, NVR enters into contractual commitmentsinvolving financial instruments with off-balance sheet risk. These financialinstruments include commitments to extend mortgage loans to customers andforward contracts to sell mortgage-backed securities to broker/dealers. Theseinstruments involve, to varying degrees, elements of credit and market rate riskin excess of the amounts recognized in the balance sheet.

NVR's exposure to credit loss, in the event of non-performance by thecustomers, is represented by the contractual amount of the commitment for themortgage loans. NVR Finance uses the same credit policies in making commitmentsas it does for on-balance sheet mortgage loans.

There were mortgage loan commitments aggregating approximately $106,969 and$120,716 outstanding at December 31, 2000 and 1999, respectively. The fairvalues of mortgage loan commitments were approximately $107,457 and $120,914 atDecember 31, 2000 and 1999, respectively. There were open forward deliverycontracts aggregating approximately $135,306 and $198,131 at December 31, 2000and 1999, respectively. The fair values of open forward delivery contracts wereapproximately $134,386 and $198,181 at December 31, 2000 and 1999, respectively.

NVR enters into contractual commitments to extend credit to buyers ofsingle-family homes with fixed expiration dates. The commitments becomeeffective when the borrowers "lock-in" a specified interest rate within timeframes established by NVR. All mortgagors are evaluated for credit worthinessprior to the extension of the commitment. Market risk arises if interest rates




move adversely between the time of the "lock-in" of rates by the borrower andthe sale date to a broker/dealer. This market risk is managed by entering intoforward contracts as discussed below.

Since certain of the commitments are expected to expire without a loanclosing, the total contractual amounts do not necessarily represent future cashrequirements. Collateral for loans granted is obtained by a first mortgagesecurity interest in real estate whose appraised values exceed the contractualamount of the commitment.

NVR enters into optional and mandatory forward delivery contracts to sellmortgage-backed securities at specific prices and dates to broker/dealers. NVRhas established policies governing which broker/dealers can be used to conductthese activities. Credit risk associated with forward contracts is limited tothe replacement cost of those forward contracts in a gain position, and atDecember 31, 2000 and 1999 there were no such positions. There were nocounterparty default losses on forward contracts in 2000, 1999 or 1998. Marketrisk with respect to forward contracts arises from changes in the value ofcontractual positions due to fluctuations in interest rates. NVR limits itsexposure to market risk by monitoring differences between the total ofcommitments to customers and loans held for sale and forward contracts withbroker/dealers. In the event NVR has forward delivery contract commitments inexcess of available mortgage-backed securities, NVR completes the transaction byeither paying or receiving a fee to/from the broker/dealer equal to theincrease/decrease in the market value of the forward contract. NVR has nomarket risk associated with optional delivery contracts because NVR has theright but not the obligation to deliver mortgage backed securities tobroker/dealers under these contracts.

33<PAGE>

NVR, Inc. Notes to Consolidated Financial Statements (dollars in thousands, except per share data)

5. Property, Plant and Equipment, net

<TABLE><CAPTION> December 31, ------------------------- 2000 1999 ------- --------<S> <C> <C> Homebuilding: Office facilities and other $ 6,496 $ 5,992 Model home furniture and fixtures 9,776 8,583 Manufacturing facilities 11,336 10,330 Property under capital leases 4,234 4,234 -------- -------- 31,842 29,139 Less: accumulated depreciation and amortization (18,328) (16,025) -------- -------- $ 13,514 $ 13,114 ======== ======== Mortgage Banking: Office facilities and other $ 5,372 $ 8,640 Less: accumulated depreciation and amortization (3,021) (4,401) -------- -------- $ 2,351 $ 4,239 ======== ========</TABLE>

Certain property, plant and equipment listed above are collateral forvarious debt of NVR and certain of its subsidiaries as more fully described innote 6.

6. Debt




<TABLE><CAPTION> December 31, ------------------------ 2000 1999 -------- --------<S> <C> <C> Homebuilding: Notes payable: Working capital revolving credit (a) $ - $ - Other 210 2,128 -------- -------- $ 210 $ 2,128 ======== ======== Other term debt: Capital lease and financing obligations due in monthly installments through 2014 (b) $ 4,957 $ 5,206 ======== ======== Senior notes (c) $115,000 $145,000 ======== ======== Mortgage Banking: Mortgage warehouse revolving credit (d) $ 53,190 $107,588 Mortgage repurchase facility (e) 17,363 Capital lease and financing obligations due in monthly installments through 2004 (b) 298 848 -------- --------

$ 53,488 $125,799 ======== ========</TABLE>

(a) The Company, as borrower, has available an unsecured working capitalrevolving credit facility (the "Facility") that currently provides for unsecuredborrowings up to $60,000, subject to certain borrowing base limitations. TheFacility is generally available to fund working capital needs of NVR'shomebuilding segment. Up to approximately $24,000 of the Facility is currentlyavailable for issuance in the form of letters of credit of which $15,779 and$12,542 were issued at December 31, 2000 and 1999, respectively. The Facilityexpires May 31, 2003 and outstanding amounts bear interest at the election ofthe Company, at (i) the base rate of interest announced by the Facility agent or(ii) 1.35% above the Eurodollar Rate. The weighted average interest rates forthe amounts outstanding under the Facility were 8.0% and 6.5% for 2000 and 1999,respectively. At December 31, 2000, there were no borrowing base limitationsreducing the amount available to the Company for borrowings.

34<PAGE>


The Facility contains numerous operating and financial covenants, includingrequired levels of net worth, fixed charge coverage ratios, and several othercovenants related to the construction operations of NVR. In addition, theFacility contains restrictions on the ability of NVR to, among other things,incur debt and make investments. Also, the Facility prohibits NVR from payingdividends to shareholders.

(b) The capital lease and financing obligations have either fixed or variableinterest rates ranging from 3.0% to 13.0% and are collateralized by land,buildings and equipment with a net book value of approximately $5,900 and $6,700at December 31, 2000 and 1999, respectively.

During December 1998, the Company exercised its option to purchase twooffice buildings previously utilized by NVR for certain administrative functionsof both its homebuilding and mortgage banking segments, thereby extinguishingthe Company's obligations under the capital lease pertaining to these buildings.The Company expended funds of $12,295, excluding accrued interest, to extinguish




the capital lease obligation, which resulted in an extraordinary loss of $2,275,net of a $1,424 tax benefit, ($0.17 per diluted share), in the accompanyingconsolidated income statements. During 1999, the Company sold both buildings toan unrelated third party and leased back one of the buildings for a five-yearterm expiring in 2004. There was no resultant material gain or loss on the saletransaction.

The following schedule provides future minimum lease payments under allfinancing and capital leases together with the present value as of December 31,2000:

Years ending December 31, --------------------------------------- 2001 $ 968 2002 968 2003 949 2004 853 2005 716 Thereafter 5,780 ------- 10,234 Amount representing interest 4,979 ------- $ 5,255 =======

(c) On January 20, 1998, the Company filed a shelf registration statement withthe Securities and Exchange Commission for the issuance of up to $400,000 of theCompany's debt securities. The shelf registration statement was declaredeffective on February 27, 1998 and provides that securities may be offered fromtime to time in one or more series, and in the form of senior or subordinateddebt.

On April 14, 1998, the Company completed an offering under the shelfregistration statement for $145,000 of senior notes due 2005 (the "New SeniorNotes"), resulting in aggregate net proceeds to the Company of approximately$142,800 after fees and expenses. The New Senior Notes mature on June 1, 2005and bear interest at 8%, payable semi-annually on June 1 and December 1 of eachyear, commencing June 1, 1998. The New Senior Notes are senior unsecuredobligations of the Company, ranking equally in right of payment with theCompany's other existing and future unsecured indebtedness. The New Senior Notesare redeemable at the option of the Company, in whole or in part, at any time onor after June 1, 2003 at redemption prices ranging from 104% of par in 2003 topar beginning in 2005.

The indenture governing the New Senior Notes has, among other items,limitations on asset sales by NVR and requires that NVR, on a consolidatedbasis, maintain a net worth of at least $80,000. In addition, the indenturelimits dividends, certain investments and NVR's ability to incur additional debtif NVR is in default under the indenture or if NVR does not meet certain fixedcharge coverage ratios.

35<PAGE>


Through a tender offer commenced on April 21, 1998 and completed May 18,1998, various open market purchases throughout 1998 and a contractual callexercised on December 1, 1998, the Company repurchased all of the $120,000 inaggregate principal then outstanding under the Company's 11% Senior Notes due2003 ("Senior Notes"). The Senior Notes were retired upon purchase. The amountof funds expended to complete the Senior Note Repurchase totaled $129,345,excluding accrued interest, and resulted in the recognition of an extraordinaryloss of $7,126, net of a $4,461 tax benefit, ($0.54 per diluted share), in theaccompanying consolidated income statements.

During 2000, NVR purchased, in the open market, an aggregate of $30,000 in




principal amount of New Senior Notes. The New Senior Notes were purchased atpar, with no material gain or loss resulting from the transaction. There is anaggregate of $115,000 of New Senior Notes outstanding at December, 2000.

(d) The mortgage warehouse facility ("Mortgage Warehouse Revolving Credit") ofNVR Finance has a borrowing limit at December 31, 2000 of $100,000. The interestrate under the Mortgage Warehouse Revolving Credit agreement is either: (i) theLondon Interbank Offering Rate ("Libor") plus 1.25%, or (ii) 1.25% to the extentthat NVR Finance provides compensating balances and depending on the type ofcollateral. The weighted average interest rates for amounts outstanding underthe Mortgage Warehouse Revolving Credit line were 3.3% and 5.8% during 2000 and1999, respectively. Primarily mortgage loans and gestation mortgage-backedsecurities collateralize the Mortgage Warehouse Revolving Credit agreement. TheMortgage Warehouse Revolving Credit Agreement is an annually renewable facilityand currently expires August 31, 2001.

The Mortgage Warehouse Revolving Credit agreement includes, among otheritems, restrictions on NVR Finance incurring additional borrowings and makingintercompany dividends and tax payments. In addition, NVR Finance is requiredto maintain a minimum net worth.

(e) NVR Finance from time to time enters into various gestation and repurchaseagreements. NVR Finance currently has available an aggregate of $150,000 ofborrowing capacity in such uncommitted facilities. Amounts outstandingthereunder accrue interest at various rates tied to the Libor rate and arecollateralized by gestation mortgage-backed securities and whole loans. Theuncommitted facilities generally require NVR Finance to, among other items,maintain a minimum net worth and limit its level of liabilities in relation toits net worth. The weighted average interest rates for amounts outstanding underthese uncommitted facilities were 6.7% and 5.5% during 2000 and 1999,respectively. The average amount outstanding under these uncommitted facilitieswas $33,117 and $41,152 during 2000 and 1999 respectively.

* * * * *

Maturities with respect to the other notes payable, other term debt, andthe New Senior Notes as of December 31, 2000 are as follows:

Years ending December 31, -------------------------------- 2001 $ 569 2002 409 2003 424 2004 385 2005 115,333 Thereafter 3,345

The $115,333 maturing during 2005 includes $115,000 of New Senior Noteswhich mature in June 2005.

NVR Finance's mortgage warehouse facility limits the ability of NVR Financeto transfer funds to NVR in the form of dividends, loans or advances. NVRFinance had net assets of $8,000 as of December 31,

36<PAGE>


2000 that were so restricted.

At December 31, 2000, the homebuilding and mortgage banking segments hadrestricted cash of $1,130 and $7,295, respectively, which includes certaincustomer deposits, mortgagor tax, insurance, completion escrows and othercollected at closing which relates to mortgage loans held for sale and to homesales.




7. Common Stock and Forward Purchase Contract Obligation

There were 8,858,694 and 9,171,608 common shares outstanding at December31, 2000 and 1999, respectively. As of December 31, 2000, NVR had reacquired atotal of 13,492,664 shares of NVR common shares at an aggregate cost of $306,496since December 31, 1993. Approximately 1,726,000 common shares have beenreissued from the treasury in satisfaction of employee benefit liabilities andstock option exercises. Beginning in 1999, the Company issues shares from thetreasury for all stock option exercises. During 2000, 249,244 such shares wereissued. The average cost basis for the aggregate number of shares reissued fromthe treasury (including those transferred to the Deferred Compensation Plan -seenote 9) was $22.21 per share.

On October 3, 2000, NVR reached agreement with a Shareholder to purchaseapproximately 780,000 shares of its common stock effective January 2, 2001 foran aggregate purchase price of approximately $65,000. The Shareholder is notaffiliated with NVR or its subsidiaries. At December 31, 2000, the forwardpurchase contract obligation is presented separately outside of equity in theaccompanying balance sheet as temporary equity.

On January 2, 2001, NVR settled the transaction with the Shareholder bytaking physical delivery of the shares for the agreed upon purchase price paidin cash. Of the approximately 780,000 shares settled, approximately 86,000shares were used for the Company's employer contribution to the Employee StockOwnership Plan for plan year 2000 and approximately 30,000 shares were used forthe Deferred Compensation Plan (see note 9). The remaining shares were retainedin treasury.

8. Income Taxes

The provision for income taxes consists of the following:

Year Ended Year Ended Year Ended December 31, 2000 December 31, 1999 December 31, 1998 ------------------ ------------------ ------------------ Current: Federal $101,267 $72,664 $ 47,632 State 14,324 15,578 7,555 Deferred: Federal (6,560) (8,374) (10,031) State (423) (3,537) (896) -------- ------- -------- $108,608 $76,331 $ 44,260 ======== ======= ========

In addition to amounts applicable to income before taxes, the followingincome tax benefits were recorded in shareholders' equity:

<TABLE> <CAPTION> Year Ended Year Ended Year Ended December 31, 2000 December 31, 1999 December 31, 1998 ----------------- ----------------- -----------------<S> <C> <C> <C>Income tax benefits arising from compensation expense for tax purposes in excess of amounts recognized for financial statement purposes $4,628 $7,542 $3,744 ================= ================= =================</TABLE>

37<PAGE>


Deferred income taxes on NVR's consolidated balance sheets are comprised ofthe following:




December 31, ----------------------- 2000 1999 ------- ------- Total deferred tax assets $50,203 $43,267 Less: deferred tax liabilities 5,302 5,349 ------- ------- $44,901 $37,918 ======= =======

Deferred tax assets arise principally as a result of various accrualsrequired for financial reporting purposes and deferred compensation, which arenot currently deductible for tax return purposes. Deferred tax liabilities aroseat September 30,1993 upon the Company's implementation of "fresh start"accounting.

Management believes the Company will have sufficient available carry-backsand future taxable income to make it more likely than not that the net deferredtax asset will be realized. Taxable income was $276,770 and $184,161 for theyears ended December 31, 2000 and 1999.

A reconciliation of income tax expense in the accompanying statements ofincome to the amount computed by applying the statutory Federal income tax rateto income of 35% before income taxes and extraordinary losses is as follows:

<TABLE><CAPTION> Year Ended Year Ended Year Ended December 31, 2000 December 31, 1999 December 31, 1998 ----------------- ----------------- ------------------<S> <C> <C> <C>Income taxes computed at the Federal statutory rate $ 93,399 $64,824 $38,628State income taxes, net of Federal income tax benefit 9,036 7,827 4,328Non-deductible amortization 2,345 2,729 2,639Utilization of net operating loss carryforward - - (3,300)Other, net 3,828 951 1,965 -------- ------- ------- $108,608 $76,331 $44,260 ======== ======= =======</TABLE>

The merger of NVR Homes, Inc. and NVR Financial Services, Inc. into theCompany on September 30, 1998 allowed the Company to utilize a separate returnlimitation year net operating loss ("SRLY NOL") generated by the Company'spreviously owned savings and loan institution, NVR Savings Bank. As a result,the Company recognized a $3,300 tax benefit during 1998. The SRLY NOL has beenfully utilized and there remains no unused carryforward.

38<PAGE>


9. Profit Sharing and Incentive Plans

Profit Sharing Plans--NVR has a trustee-administered, profit sharingretirement plan (the "Profit Sharing Plan") and an Employee Stock Ownership Plan("ESOP") covering substantially all employees. The Profit Sharing Plan and theESOP provide for annual discretionary contributions in amounts as determined bythe NVR Board of Directors (the "Board"). The combined plan expense for theyears ended December 31, 2000, 1999 and 1998 was $8,320, $7,712 and $6,436,respectively. During 2000 and 1999, the ESOP purchased in the open market 11,000and 105,440 shares respectively of NVR common stock using cash contributionsprovided by NVR. Subsequent to December 31, 2000, the ESOP purchased




approximately 86,000 shares to fund the Board approved 2000 employercontribution. As of December 31, 2000, all shares held by the ESOP have beencommitted to be released to participant accounts.

Management Incentive Plans--Management long-term incentive plans provideseveral types of equity incentives to NVR's executives and managers. The equityincentives take the form of stock options and performance share awards asdescribed below. Stock options issued under the management long-term incentiveplans are issued with an exercise price equal to the market value of theunderlying shares on the date of grant.

Under the Management Incentive Plan adopted by the Board in 1993,participants received options to purchase a total of 1,117,949 NVR shares (the"1993 NVR Share Options"). The 1993 NVR Share Options issued under theManagement Incentive Plan were fully vested as of December 31, 1996, andgenerally expire 10 years after the dates upon which they were granted.

Under the 1994 Management Incentive Plan (the "1994 Incentive Plan"),executive officers and other employees of the Company were eligible to receivestock options (the "1994 NVR Share Options") and performance shares (the "1994Performance Shares"). There were 48,195 1994 NVR Share Options and 1,124,9291994 Performance Shares authorized for grant under the 1994 Incentive Plan. The1994 NVR Share Options generally expire 10 years after the dates upon which theywere granted, and were fully vested as of December 31, 1999. All 1,124,929 1994Performance Shares have been granted to employees under the 1994 Incentive Plan,and all 1994 Performance Shares were vested as of December 31, 1999. For theyears ended December 31, 2000, 1999 and 1998, compensation expense recognizedfor the 1994 Performance Shares totaled $0, $18,670 and $9,081, respectively.

During 1996, the Company's Shareholders approved the Board of Directors'adoption of the Management Long-Term Stock Option Plan (the "1996 Option Plan").There are 2,000,000 non-qualified stock options ("Options") authorized under theManagement Long Term Stock Option Plan. The Options generally expire 10 yearsafter the dates upon which they were granted, and vest in one-third incrementson each of December 31, 2000, 2001 and 2002, with vesting based upon continuedemployment.

During 1999, the Company's Shareholders approved the Board of Directors'adoption of the 1998 Management Long-Term Stock Option Plan (the "1998 OptionPlan"). There are 1,000,000 non-qualified stock options ("Options") authorizedunder the 1998 Option Plan. The Options generally expire 10 years after thedates upon which they were granted, and vest in one-third increments on each ofDecember 31, 2003, 2004 and 2005, with vesting based upon continued employment.

39<PAGE>


During 2000, the Board approved the 2000 Broadly-based Stock Option Plan(The "2000 Plan"). There are 2,000,000 non-qualified stock options ("Options")authorized under the 2000 Plan. Grants under the 2000 Plan will be available toboth employees and members of the Board. There have been no grants issued underthe 2000 Plan as of December 31, 2000. Options granted under the 2000 Plan willgenerally expire 10 years from the date of grant, and will vest in one-thirdincrements on each of December 31, 2006, 2007 and 2008.

40<PAGE>

NVR, Inc Notes to Consolidated Financial Statements (dollars in thousands, except per share data)

<TABLE><CAPTION> 2000 1999 1998 -------------------- ------------------ -----------------------




Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise1993 NVR Share Options Options Prices Options Prices Options Prices- ---------------------- ------- ------- ------- ------ ------- ------<S> <C> <C> <C> <C> <C> <C>Options outstanding at the beginning of the year 359,771 $ 7.60 830,971 $ 7.60 958,952 $ 7.60Granted - $ - - $ - - $ -Canceled - $ - - $ - - $ -Exercised (140,675) $ 8.01 (471,200) $ 7.62 (127,981) $ 7.62 --------- ---------- ----------Outstanding at end of year 219,096 $ 7.71 359,771 $ 7.60 830,971 $ 7.60 ========= ========== ==========Exercisable at end of year 219,096 $ 7.71 359,771 $ 7.60 830,971 $ 7.60 ========= ========== ==========1994 NVR Share Options- ----------------------Options outstanding at the beginning of the year 35,032 $ 20.86 43,363 $19.54 35,000 $14.00Granted - $ - - $ - 13,195 $32.20Canceled - $ - - $ - - $ -Exercised (18,636) $ 21.30 (8,331) $14.00 (4,832) $14.00 --------- ---------- ----------Outstanding at end of year 16,396 $ 20.35 35,032 $20.86 43,363 $19.54 ========= ========== ==========Exercisable at end of year 16,396 $ 20.35 29,569 $19.02 22,898 $17.50 ========= ========== ==========1996 Option Plan- ----------------Options outstanding at the beginning of the year 1,891,905 $ 14.70 1,753,405 $11.42 1,770,000 $11.30Granted 85,000 $ 56.84 200,500 $42.65 13,405 $25.00Canceled (111,067) $ 26.31 (62,000) $12.48 (30,000) $10.63Exercised (18,433) $ 25.50 - $ - - $ - --------- ---------- ----------Outstanding at end of year 1,847,405 $ 15.83 1,891,905 $14.70 1,753,405 $11.42 ========= ========== ==========Exercisable at end of year 615,802 $ 15.83 - $ - - $ - ========= ========== ==========1998 Option Plan- ----------------Options outstanding at the beginning of the year 927,000 $ 47.63 - $ - - $ -Granted 104,500 $ 66.18 927,000 $47.63 - $ -




Canceled (31,500) $ 47.63 - $ - - $ -Exercised - $ - - $ - - $ - --------- ---------- ----------Outstanding at end of year 1,000,000 $ 49.57 927,000 $47.63 - $ - ========= ========== ==========Exercisable at end of year - $ - - $ - - $ - ========= ========== ==========</TABLE>

<TABLE><CAPTION> Weighted Weighted Average Average Remaining Exercise ContractualRange of Exercise Prices Number Price Life in Years- ------------------------ ------ -------- -------------<S> <C> <C> <C>1993 NVR Share Options- ---------------------Outstanding at December 31, 2000: $5.06 - $6.41 14,200 $ 5.35 4.1 $7.62 - $9.11 204,896 $ 7.87 2.9Exercisable at December 31, 2000 $5.06 - $6.41 14,200 $ 5.35 $7.62 - $9.11 204,896 $ 7.871994 NVR Share Options- ----------------------Outstanding at December 31, 2000: $14.00 - $14.00 9,833 $14.00 6.2 $25.00 - $34.50 6,563 $29.88 7.6Exercisable at December 31, 2000: $14.00 - $14.00 9,833 $14.00 $25.00 - $34.50 6,563 $29.88</TABLE><PAGE>


<TABLE><CAPTION> Weighted Weighted Average Average Remaining Exercise ContractualRange of Exercise Prices Number Price Life in Years- ------------------------ ------ ----- -------------<S> <C> <C> <C>1996 Option Plan- ----------------Outstanding at December 31, 2000: $ 9.13 - $10.63 1,478,000 $10.59 5.4 $14.00 - $21.00 135,000 $17.84 6.8 $22.63 - $25.00 13,405 $23.59 6.9 $38.00 - $52.75 180,500 $44.10 8.6 $62.13 - $81.75 40,500 $71.87 9.7Exercisable at December 31, 2000: $ 9.13 - $10.63 492,667 $10.59 $14.00 - $21.00 45,000 $17.84 $22.63 - $25.00 4,468 $23.59 $38.00 - $52.75 60,167 $44.10




$62.13 - $81.75 13,500 $71.87

*1998 Option Plan- -----------------Outstanding at December 31, 2000: $43.50 - $62.13 945,000 $47.89 8.4 $72.00 - $81.75 55,000 $78.30 8.4</TABLE>

*None of the options outstanding under the 1998 Option Plan are exercisable atDecember 31, 2000.

The weighted average fair values of grants made in 2000, 1999 and 1998 formanagement incentive plans were $39.76, $29.41 and $18.65, respectively. Thefair values of the options granted were estimated on the grant date using theBlack-Scholes option-pricing model based on the following weighted averageassumptions:

2000 1999 1998 ------------ ------------ ------------

Estimated option life 10 years 10 years 10 years Risk free interest rate 6.12% 5.94% 5.52% Expected volatility 40.77% 40.19% 45.14% Expected dividend yield 0.00% 0.00% 0.00%

Director Incentive Plans--The NVR Directors' Long Term Incentive Plan("1993 Directors' Plan") provides for each eligible director to be grantedoptions to purchase 22,750 shares of common stock with a maximum number ofshares issuable under the plan of 364,000. There were 182,000 Directors' Optionsgranted to eligible directors on September 30, 1993 at a grant price of $16.60per share, which exceeded the fair value of the underlying shares on the date ofgrant. The options became exercisable six months after the date of grant andexpire in September 2003.

There were 192,000 options to purchase shares of common stock authorizedand granted in 1996 to the Company's outside directors under the Directors' LongTerm Stock Option Plan (the "1996 Directors' Plan"). There are no additionaloptions available for grant under this plan. The option exercise price for theoptions granted was $10.25 per share, which was equal to the fair market valueof the Company's Shares on the date of grant. The Options were granted for a 10-year period beginning from the date of grant, and vest in one-third incrementson each of December 31, 1999, 2000, and 2001. There were 24,000 previouslyunvested 1996 Directors' Options exercised during 1998, pursuant to a separationof service due to death clause within the 1996 Directors' Plan.

42<PAGE>


There were 150,000 options to purchase shares of common stock authorizedfor grant in 1999 to the Company's outside directors under the 1998 Directors'Long Term Stock Option Plan (the "1998 Directors' Plan"). A total of 87,500options were granted at an exercise price of $49.06, which was equal to the fairmarket value of the Company's Shares on the date of grant. The Options weregranted for a 10 year period beginning from the date of grant, and vest intwenty-five percent (25%) increments on each of December 31, 2002, 2003, 2004and 2005.




2000 1999 1998 ------------------ ----------------- --------------- Exercise Exercise Exercise1993 Directors' Plan Options Price Options Price Options Price- -------------------- ------- ------ ------- ------ ------- ------<S> <C> <C> <C> <C> <C> <C>Options outstanding at the beginning of the year 101,000 $16.60 113,750 $16.60 182,000 $16.60Granted - $ - - $ - - $ -Canceled - $ - - $ - - $ -Exercised (55,500) $16.60 (12,750) $16.60 (68,250) $16.60 ------- ------- -------Outstanding at end of year 45,500 $16.60 101,000 $16.60 113,750 $16.60 ======= ======= =======Exercisable at end of year 45,500 $16.60 101,000 $16.60 113,750 $16.60 ======= ======= =======1996 Directors' Plan- --------------------Options outstanding at the beginning of the year 168,000 $10.25 168,000 $10.25 192,000 $10.25Granted - $ - - $ - - $ -Canceled - $ - - $ - - $ -Exercised (16,000) $10.25 - $ - (24,000) $10.25 ------- ------- -------Outstanding at end of year 152,000 $10.25 168,000 $10.25 168,000 $10.25 ======= ======= =======Exercisable at end of year 96,000 $10.25 56,000 $10.25 - $ - ======= ======= =======1998 Directors' Plan- --------------------Options outstanding at the beginning of the year 87,500 $49.06 - $ - - $ -Granted - $ - 87,500 $49.06 - $ -Canceled 9,375 $49.06 - $ - - $ -Exercised - $ - - $ - - $ - ------- ------- -------Outstanding at end of year 78,125 $49.06 87,500 $49.06 - $ - ======= ======= =======Exercisable at end of year - $ - - $ - - $ - ======= ======= =======</TABLE>

The weighted average fair value of grants made during 1999 under directorincentive plans was $30.48 per share. The fair value was calculated using theBlack-Scholes option pricing model, under the following assumptions: i) theestimated option life was equal to ten years, ii) the risk free interest ratewas 5.77%, iii) the expected volatility equaled 40.19%, and iv) the estimateddividend yield was 0%.

************

SFAS No. 123 requires companies who continue to apply Opinion 25 to accountfor their stock-based employee compensation arrangements to provide pro formanet income and earnings per share as if the fair value based method had beenused to account for compensation cost. Accordingly, pro forma net income andearnings per share would have been $152,503 ($14.44 per diluted share), $104,122($8.61 per diluted share) and $55,352 ($4.16 per diluted share) for the yearsended December 31, 2000, 1999 and 1998, respectively, if the Company hadaccounted for its stock based employee compensation arrangements using the fairvalue method. The 2000, 1999 and 1998 effects of applying SFAS No. 123 forproviding pro forma disclosures are not likely to be representative of theeffects on reported net income and earnings per share for future years becausethe number of option grants and the fair value assigned to future grants could




differ.


To minimize the non-deductibility of executive compensation expense due tothe limitations of Section 162(m) of the Internal Revenue Code and stillmaintain the ability to competitively compensate the Company's executiveofficers, the Company established a deferred compensation plan (Deferred CompPlan). The specific purpose of the Deferred Comp Plan was to establish avehicle whereby the executive officers could defer the receipt of compensationthat otherwise would be nondeductible for tax purposes into a period where theCompany would realize a tax deduction for the amounts paid. The Deferred CompPlan is also available to other members of the Company's management group.Amounts deferred into the Deferred Comp Plan are invested in NVR common stockand are paid out in a fixed number of shares upon expiration of the deferralperiod.

The Deferred Comp Plan Trust was funded during the first quarter of 2000with 305,863 NVR shares issued from the Company's treasury stock account. Thebasis for the shares reissued from the treasury was $47.25 per share. Inaddition, the Deferred Comp Plan Trust purchased 34,840 NVR common shares on theopen market at an aggregate cost of $1,606. The compensation deferred wasrelated to benefits earned by NVR employees under the Company's 1994 ManagementEquity Incentive Plan and the 1996 High Performance Plan. During the 2000 thirdquarter, 3,000 shares were distributed from the Deferred Comp Plan. There are337,703 shares held by the Deferred Comp Plan at December 31, 2000. Theseshares are treated as outstanding shares in the earnings per share calculationfor the year ended December 31, 2000. Subsequent to December 31, 2000, theDeferred Comp Plan was funded with an additional 30,000 shares of stock. Seenote 7.

10. Commitments and Contingent Liabilities

NVR is committed under several non-cancelable operating leases involvingoffice space, manufacturing facilities and equipment. Future minimum leasepayments under these operating leases as of December 31, 2000 are as follows:

Years ended December 31, -------------------------------------- 2001 $12,358 2002 7,648 2003 5,315 2004 3,792 2005 2,219 Thereafter 3,922 ------- $35,254 =======

Total rent expense incurred under operating leases was approximately$12,000, $10,800, and $7,787 for the years ended December 31, 2000, 1999 and1998, respectively.

During the ordinary course of operating the mortgage banking andhomebuilding businesses, NVR is required to enter into bond or letter of creditarrangements with local municipalities, government agencies, or land developersto collateralize its obligations under various contracts. NVR had approximately$25,020 of contingent obligations under such agreements as of December 31, 2000.NVR believes it will fulfill its obligations under the related contracts anddoes not anticipate any losses under these bonds or letters of credit.

NVR and its subsidiaries are also involved in litigation arising from thenormal course of business. In the opinion of management, and based on advice oflegal counsel, this litigation will not have any material adverse effect on thefinancial position or results of operations of NVR.





11. Mortgage-Backed Securities, net of Mortgage-Backed Bonds, and Related Assets and Liabilities

Mortgage-backed securities ("MBS") serve as collateral for the relatedmortgage-backed bonds ("Bonds") sold to third parties. The MBS cannot be soldexcept upon specified call dates of the Bonds. The calling of the Bonds atthose dates is solely at the option of the Company. Principal and interestpayments on the MBS are used to make the quarterly payments on the Bonds. Inaddition, prepayments of the underlying MBS are passed through as repayments ofthe Bonds so that the Bonds may be fully paid prior to their stated maturities.The Bonds are not guaranteed by NVR or any of its subsidiaries, other than theissuing Limited-Purpose Financing Subsidiary.

A trustee for the benefit of the bondholders holds the MBS and the reserveamounts, which constitute the collateral for the Bonds of a series. Thespecific collateral pledged to secure a particular series is not available ascollateral for any other series. In addition, the Company may, under certaincircumstances, redeem certain series of Bonds. In such certain circumstances,the Bonds are redeemed at par and any market appreciation or depreciationaccrues to the Company.

The following comprise the assets and liabilities of the Limited PurposeFinancing Subsidiary:

December 31, ------------------ 2000 1999 -------- -------- Assets: Mortgage-backed securities, net $ 4,632 $ 5,110 Funds held by trustee 23 83 Other assets 212 257 -------- -------- Total assets 4,867 5,450 -------- --------

Liabilities: Accrued expenses and other liabilities 164 211 Mortgage-backed bonds, net unamortized discounts 4,693 5,229 -------- -------- Total liabilities 4,857 5,440 -------- --------

Mortgage-backed securities, net of mortgage- backed bonds, and related assets and liabilities $ 10 $ 10 ======== ========

The weighted average portfolio yield on the MBS was approximately 9.0% ateach of December 31, 2000 and 1999, respectively. The Bonds mature on October1, 2016 and bear interest at 9.0%. However, NVR has the contractual right tocall the Bonds in 2001.

12. Mortgage Banking Segment Restructuring Plan

During the first quarter of 2000, NVR formulated a detailed plan to alignits mortgage banking operations to exclusively serve the Company's homebuildingcustomers. The plan specifically entailed the closure of all of the Company'sretail operations, including all of the retail branches acquired from theacquisition of First Republic Mortgage Corporation ("First Republic") acquiredin March 1999. This action was consistent with the Company's decision inDecember 1999 to exit the wholesale mortgage origination business. TheCompany's mortgage banking operation is now solely focused on serving theCompany's homebuilding operations. The restructuring plan was substantiallycompleted during the second quarter of 2000.

As a result of the restructuring, the Company recorded a restructuring andasset impairment charge of $5,926 in the first quarter of 2000. A detail of the




costs comprising the total charge incurred in the first quarter is as follows:

45<PAGE>


Write off of First Republic goodwill $2,575 Noncancelable office and equipment leases 1,480 Asset impairments 1,362 Severance 509 ------ Total $5,926 ======

During 2000, approximately $863 in severance and lease costs was appliedagainst the restructuring reserve. In addition, during the third quarter theCompany reversed approximately $200 in restructuring reserves, primarily forunused severance costs. Approximately $930 of the restructuring accrualestablished at March 31, 2000, remains at December 31, 2000, and primarilyrelates to accrued lease costs.

13. Quarterly Results [unaudited]

The following table sets forth unaudited selected financial data andoperating information on a quarterly basis for the years ended December 31, 2000and 1999. Diluted earnings per share presented for the quarters ended March 31,June 30, and September 30, 2000 have been increased by $0.18, $0.25 and $0.33respectively from the amounts previously reported to reflect the fullrealization of potential tax benefits from the hypothetical exercise ofoutstanding stock options under the treasury stock method.

Year Ended December 31, 2000 -------------------------------------- 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter -------- -------- -------- --------Revenues-homebuilding operations $490,581 $558,506 $602,485 $616,238Gross profit - homebuilding operations $ 90,904 $103,524 $117,071 $122,252Mortgage banking fees $ 7,597 $ 7,622 $ 12,950 $ 10,588Net income $ 30,574 $ 37,204 $ 43,914 $ 46,554Diluted earnings per share $ 2.90 $ 3.62 $ 4.30 $ 4.51Contracts for sale, net of cancellations (units) 2,609 3,010 2,180 2,469Settlements (units) 2,236 2,469 2,674 2,676Backlog, end of period (units) 5,308 5,849 5,355 5,148Loans closed $469,598 $467,818 $401,037 $411,267

Year Ended December 31, 1999 -------------------------------------- 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter -------- -------- -------- --------Revenues-homebuilding operations $429,687 $492,058 $523,552 $497,363Gross profit - homebuilding operations $ 73,143 $ 83,891 $ 90,172 $ 84,727Mortgage banking fees $ 13,522 $ 12,465 $ 13,162 $ 8,973Income before extraordinary loss $ 26,007 $ 28,263 $ 30,341 $ 24,270Diluted earnings per share $ 2.02 $ 2.26 $ 2.52 $ 2.18

Contracts for sale, net of cancellations (units) 2,541 2,855 1,866 2,416Settlements (units) 2,098 2,424 2,516 2,278Backlog, end of period (units) 5,016 5,447 4,797 4,935Loans closed $779,406 $869,774 $675,593 $587,092




46</TEXT></DOCUMENT><DOCUMENT><TYPE>EX-4.5<SEQUENCE>2<FILENAME>0002.txt<DESCRIPTION>EXHIBIT 4.5<TEXT>

<PAGE>

EXHIBIT 4.5

SECOND SUPPLEMENTAL INDENTURE

SECOND SUPPLEMENTAL INDENTURE (this "Second Supplemental Indenture"), dated -----------------------------as of February 27, 2001, between NVR, INC., a Virginia corporation (the"Company"), having its principal office at 7601 Lewinsville Road, Suite 300, -------McLean, Virginia, 22102 and THE BANK OF NEW YORK, a New York banking corporation(the "Trustee"), having a Corporate Trust Office at 101 Barclay Street, 21st -------Floor, New York, New York, as Trustee under the Base Indenture, the FirstSupplemental Indenture, and this Second Supplemental Indenture (each ashereinafter defined). Capitalized terms used and not otherwise defined hereinshall have the meaning set forth in the Base Indenture (as defined).

R E C I T A L S

WHEREAS, the Company and the Trustee have heretofore executed and deliveredto the Trustee an Indenture, dated as of April 14, 1998 (the "Base Indenture"), --------------as amended and supplemented by the first supplemental indenture, dated as ofApril 14, 1998 (the "First Supplemental Indenture" and, together with the Base ----------------------------Indenture, the "Indenture") pursuant to which the Company's 8% Senior Notes due ---------2005 were issued;

WHEREAS, in accordance with Section 902 of the Base Indenture, the Companyand the Trustee are authorized and permitted to amend and supplement theIndenture as set forth herein (the "Amendment"), with the consent of the Holders ---------of not less than a majority in principal amount of all Outstanding Securities,and (1) the Holders of a majority in principal amount of all OutstandingSecurities have consented to the Amendment and (2) all other requirements setforth in the Base Indenture to make this Second Supplemental Indenture effectivehave been satisfied; and

WHEREAS, the Company and the Trustee deem it advisable to enter into thisSecond Supplemental Indenture for the purpose of amending the Indenture in orderto provide the Company with greater flexibility to continue to repurchase sharesof its outstanding common stock as part of its strategy of maximizingshareholder value.

NOW, THEREFORE, THIS SECOND SUPPLEMENTAL INDENTURE WITNESSETH:

For and in consideration of the foregoing and for other good and valuableconsideration, the receipt of which is hereby acknowledged, the Company and theTrustee mutually covenant and agree for the equal and proportionate benefit ofall Holders of the Notes as follows:

SECTION 1.01 AMENDMENT. Section 5.01 of the First Supplemental Indentureis amended and restated in its entirety as follows:

"Section 5.01 Limitations on Restricted Payments. Until the Notes arerated Investment Grade by both Rating Agencies, after which time the followingcovenant no longer shall be binding on the Company or any Restricted Subsidiary:




(a) neither the Company nor any of its Restricted Subsidiaries shall,directly or<PAGE>

indirectly, make any Restricted Payment, if, after giving effect thereto on apro forma basis:

(i) the Company could not Incur $1.00 of additional Indebtedness pursuant to provisions described in paragraph (b) of Section 5.02 hereof;

(ii) a Default or an Event of Default would occur or be continuing; or

(iii) the aggregate amount of all Restricted Payments, including such proposed Restricted Payment, made by the Company and its Restricted Subsidiaries, from and after the Issue Date and on or prior to the date of such Restricted Payment, shall exceed the sum (the "Basket") of:

(A) 50% of Consolidated Net Income of the Company for the period (taken as one accounting period), commencing with the first full fiscal quarter which includes the Issue Date, to and including the fiscal quarter ended immediately prior to the date of each calculation for which internal financial statements are available (or, if Consolidated Net Income for such period is negative, then minus 100% of such deficit); plus

(B) 100% of the amount of any Indebtedness of the Company or a Restricted Subsidiary Incurred after the Issue Date that is converted into or exchanged for Qualified Capital Stock of the Company after the Issue Date; plus

(C) to the extent that any Restricted Investment made after the date of this First Supplemental Indenture is sold for cash or otherwise reduced or liquidated or repaid for cash, in whole or in part, the lesser of (1) the cash return of capital with respect to such Restricted Investment (less the cost of disposition, if any) and (2) the initial amount of such Restricted Investment; plus

(D) unless accounted for pursuant to clause (B) above, 100% of the aggregate net proceeds (after payment of reasonable out- of-pocket expenses, commissions and discounts incurred in connection therewith) received by the Company from the sale or issuance (other than to a Subsidiary of the Company) of its Qualified Capital Stock after the Issue Date and on or prior to the date of such Restricted Payment; plus

(E) with respect to any Unrestricted Subsidiary that is redesignated as a Restricted Subsidiary after the Issue Date in accordance with the definition of Unrestricted Subsidiary (so long as the designation of such Subsidiary as an Unrestricted Subsidiary was treated as a Restricted Payment made after the Issue Date and only to the extent not included in the calculation of Consolidated Net Income), an amount equal to the lesser of (x) the book value in accordance with GAAP of the Company's or a Restricted Subsidiary's Investment in such Subsidiary, and (y) the Designation Amount at the time of such Subsidiary's designation as an Unrestricted Subsidiary; plus

(F) 100% of tax benefits, if any, for the period (taken as one accounting period), commencing with the first full fiscal quarter which includes the Issue Date, realized by the Company from stock option exercises and from the issuance of the Company's Qualified Capital Stock pursuant to equity-based employee benefit plans that are recorded as an increase to shareholders' equity in accordance with GAAP; plus

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(G) $50,000,000.




(b) The foregoing clause (a) does not prohibit:

(i) the payment of any dividend within 60 days after the date of its declaration if such dividend could have been made on the date of its declaration in compliance with the foregoing provisions;

(ii) the payment of cash dividends or other distributions to any Equity Investor or joint venture participant of a Restricted Subsidiary with respect to a class of Capital Stock of such Restricted Subsidiary or joint venture owned by such Equity Investor or joint venture participant so long as the Company or its Restricted Subsidiaries simultaneously receive a dividend or distribution with respect to their Investment in such Restricted Subsidiary or joint venture either in U.S. Legal Tender or the same form as the dividend or distribution received by such Equity Investor or joint venture participant and in proportion to their proportionate interest in the same class of Capital Stock of such Restricted Subsidiary (or in the case of a joint venture that is a partnership or a limited liability company, as provided for in the documentation governing such joint venture), as the case may be;

(iii) repurchases or redemptions of Capital Stock of the Company from any former directors, officers and employees of the Company in the aggregate up to $3,000,000 during any calendar year (provided, however, that any amounts not used in any calendar year may be used in any subsequent year);

(iv) the retirement of Capital Stock of the Company or the retirement in Indebtedness of the Company, in exchange for or out of the proceeds of a substantially concurrent sale (other than a sale to a Subsidiary of the Company) of, other shares of its Qualified Capital Stock and the retirement of Capital Stock or Indebtedness of a Restricted Subsidiary in exchange for or out of the proceeds of a substantially concurrent sale of its Qualified Capital Stock, provided that, in each case, the amount of any such proceeds is excluded for purposes of clause (a)(iii)(D) above; or

(v) repurchases by the Company of Capital Stock of the Company (from Persons other than officers or directors of the Company) in one or more open market and/or privately negotiated transactions of up to $85,000,000 in the aggregate at any time or from time to time on or before March 31, 2002; provided that any such repurchases not made pursuant to this clause (v) on or before March 31, 2002 may not be made at any subsequent time.

Any Restricted Payment made in accordance with clauses (i) and (iii) of this paragraph shall reduce the Basket. In calculating the Basket, any Restricted Payment not made in cash and any non-cash amounts received for purposes of clause (D) shall be valued at fair market value as determined in good faith by the Board of Directors, whose determination shall be conclusive and whose resolution with respect thereto shall be delivered to the Trustee promptly after the adoption thereof."

SECTION 1.02 NEW YORK LAW TO GOVERN. THIS SECOND SUPPLEMENTAL INDENTURESHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OFNEW YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED ENTIRELY WITHIN THE STATEOF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS. EACH OF THEPARTIES HERETO AGREES TO SUBMIT TO THE JURISDICTION OF THE COURTS OF THE STATEOF NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THISSECOND SUPPLEMENTAL INDENTURE.

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SECTION 1.03 EFFECTIVE DATE. This Second Supplemental Indenture shall beeffective as of the date first above written and upon the execution and deliveryhereof by each of the parties hereto.

SECTION 1.04 COUNTERPARTS. This Second Supplemental Indenture may beexecuted in any number of counterparts, each of which so executed shall bedeemed to be an original, but all such counterparts shall together constitutebut one and the same instrument.




4<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Second SupplementalIndenture to be duly executed by their respective officers hereunto dulyauthorized, all as of the date first above written.

Dated: February 27, 2001

NVR, INC.

By: _____________________________________________ Name: Dwight C. Schar Title: Chairman of the Board, Chief Executive Officer and President

By: _____________________________________________ Name: Paul C. Saville Title: Senior Vice President, Chief Financial Officer and Treasurer

Attest:

EXHIBIT 10.3

EMPLOYMENT AGREEMENT

EMPLOYMENT AGREEMENT ("Agreement") made this first day of January 2001,between NVR, INC., a Virginia corporation (the "Company") and PAUL C. SAVILLE, aresident of Virginia (the "Executive").

WHEREAS, the parties wish to terminate all prior employment agreements andamendments thereto; and

WHEREAS, the parties wish to establish the terms of the Executive's futureemployment with the Company.

ACCORDINGLY, the parties agree as follows:

1. Employment, Duties and Acceptance. ---------------------------------

1.1 Employment by the Company. The Company hereby employs the Executive, ------------------------- for itself and its affiliates, to render exclusive and full-time services to the Company. The Executive will serve in the capacity of Senior Vice President -Finance, Chief Financial Officer and Treasurer of the Company. The Executive will perform such duties as are imposed on the holder of that office by the By-laws of the Company and such other duties as are customarily performed by one holding such position in the same or similar businesses or enterprises as those of the Company. The Executive will perform such other related duties as may be assigned to him from time to time by the Company's Board of Directors. The Executive will devote all his full working time and attention to the performance of such duties and to the promotion of the business and interests of the Company. This provision, however, will not prevent the Executive from investing his funds or<PAGE>

assets in any form or manner, or from acting as a member of the Board of Directors of any companies, businesses, or charitable organizations, so long as such investments or companies do not compete with the Company, subject to the limitations set forth in Section 7.1.

1.2 Acceptance of Employment by the Executive. The Executive accepts such -----------------------------------------




employment and shall render the services described above.

1.3 Place of Employment. The Executive's principal place of employment ------------------- shall be the Washington, D.C. metropolitan area, subject to such reasonable travel as the rendering of services associated with such position may require.

2. Duration of Employment. ----------------------

This Agreement and the employment relationship hereunder will continuein effect for six (6) years from January 1, 2001 through January 1, 2007. Itmay be extended beyond January 1, 2007 by mutual, written agreement at any time.In the event of the Executive's termination of employment during the term ofthis Agreement, the Company will be obligated to pay all base salary, bonus andother benefits then accrued, as well as cash reimbursement for all accrued butunused vacation, plus, if applicable, the additional payments provided for inSections 6.1, 6.2, 6.4 and 6.6 of this Agreement.

3. Compensation. ------------

3.1 Base Salary. As compensation for all services rendered pursuant to ----------- this Agreement, the Company will pay to the Executive an annual base salary of THREE HUNDRED SIXTY-THREE THOUSAND DOLLARS ($363,000), payable in equal monthly installments of THIRTY THOUSAND TWO HUNDRED FIFTY DOLLARS ($30,250). The Company's Board of Directors in its sole discretion may increase, but may not reduce, the Executive's annual base salary.

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3.2 Bonuses. The Executive shall be eligible to be paid a bonus annually ------- in cash or in the registered stock of NVR, Inc. as determined by the Compensation Committee of the Board of Directors or in a combination thereof in a maximum amount of 100% of the Executive's annual base salary. This bonus shall be paid at the same time (or times) and in the same manner as other senior executives of the Company. Entitlement to the bonus is dependent on the Executive meeting certain goals, which shall be established annually by the Company.

3.3 Participation in Employee Benefit Plans. The Executive shall be --------------------------------------- permitted during the term of this Agreement, if and to the extent eligible to participate in any group life, hospitalization or disability insurance plan, health program, pension plan, Employee Stock Ownership Plan or similar benefit plan of the Company, which may be available to other comparable executives of the Company generally, on the same terms as such other executives. The Executive shall be entitled to paid vacation and all customary holidays each year during the term of this Agreement in accordance with the Company's policies.

3.4 Expenses. Subject to such policies as may from time to time be --------- established by the Company's Board of Directors, the Company shall pay or reimburse the Executive for all reasonable expenses actually incurred or paid by the Executive in the performance of the Executive's services under this Agreement upon presentation of expense statements or vouchers or such other supporting information as it may require.

4. Management Long-Term Stock Option Plans. ---------------------------------------

The Executive is a participant in the 1993 NVR, Inc. Management Equity Incentive Plan, 1994 NVR, Inc. Management Equity Incentive Plan, 1996 NVR, Inc. Management Long-Term Stock Option Plan and the 1998 NVR, Inc.




Management Long-Term Stock Option Plan. The Executive has entered into separate agreements

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governing the terms of his participation in the Plans.

5. High Performance Compensation Plan. ----------------------------------

The Executive is a participant in the NVR, Inc. High Performance Compensation Plan. - Number 1 and the NVR, Inc. High Performance Compensation Plan - Number 2. The Executive has entered into separate agreements governing the terms of his participation in the Plans.

6. Termination or Disability. -------------------------

6.1 Termination Upon Death. If the Executive dies during the term hereof, ---------------------- this Agreement shall terminate, except that the Executive's legal representatives shall be entitled to receive the Executive's base salary and accrued Bonus for the period ending on the last day of the second calendar month following the month in which the Executive's death occurred. Accrued Bonus shall be calculated as one hundred percent of Base Salary multiplied by the fraction (x) the number of days in calendar year up to last day of second calendar month following the month in which Executive died divided by (y) 365 days.

6.2 Disability. If during the term hereof the Executive becomes ---------- physically or mentally disabled, whether totally or partially, so that the Executive is, in the discretion of the Company's Board of Directors, substantially unable to perform his services hereunder, the Executive shall transfer from active to disability status. Nothing in this Section 6.2 shall be deemed to in any way affect the Executive's right to participate in any disability plan maintained by the Company and for which the Executive is otherwise eligible. If the Executive transfers to disability status he would be entitled to receive the Executive's Base Salary and accrued Bonus for the period ending on the last day of the second calendar month following the month in which the Executive is transferred to disability status. Accrued Bonus shall be calculated as one hundred percent of Base Salary multiplied by the fraction (x) the number of days in calendar

4<PAGE>

year up to last day of second calendar month following the month in which the Executive was transferred to disability status divided by (y) 365 days.

6.3 Termination for Cause. If the Executive is convicted of any felony, --------------------- other crime involving moral turpitude, or any crime or offense which results in his incarceration for more than three months, is guilty of gross misconduct in connection with the performance of his duties as described in Section 1.1 hereunder, or materially, breaches affirmative or negative covenants or undertakings set forth in Section 7, the Company at any time by written notice to the Executive, may terminate the Executive's employment hereunder. Any such termination shall be for Cause.

6.4 Termination Without Cause. In the event the Company on sixty (60) ------------------------- days' notice terminates the Executive's employment without Cause (as such term is defined in Section 6.3) during the term of this Agreement, then as full satisfaction of the Company's obligations to the Executive, the Executive shall be entitled to payment of TWO HUNDRED PERCENT (200%) of his then annual base salary, paid in twelve




equal monthly installments beginning on the fifteenth day of the first month following the date of termination. The Executive shall also be provided with outplacement services with a firm jointly selected by the Executive and the Company at a cost not to exceed THIRTY THOUSAND DOLLARS ($30,000).

6.5 Voluntary Termination. The Executive may on sixty (60) days' notice --------------------- terminate his employment hereunder. In such event, he shall not be entitled to any severance pay except in the circumstances described in Section 6.6 below.

6.6 Voluntary Termination-Change of Control. In the event the Executive --------------------------------------- voluntarily terminates his employment hereunder in connection with or within one (1) year after a Change of Control of the Company (as defined below), the Executive shall receive a payment of TWO HUNDRED PERCENT (200%) of his then annual

5<PAGE>

base salary, as well as his accrued pro-rata bonus (on the assumption that the maximum annual bonus would have been paid pursuant to Section 3.2) through the date of termination. Payment of such amount shall be in twelve equal monthly installments beginning on the first day of the first month following the date of termination. For purposes of this Agreement, "Change of Control" means (i) any transaction or series of transactions (including, without limitation, a tender offer, merger or consolidation) the result of which is that any "person" or "group" (within the meaning of Section 13 (d) and 14 (d) (2) of the Exchange Act), becomes the "beneficial owner" (as defined in rule 13d-3 under the Exchange Act) of more than 50 percent of the total aggregate voting power of all classes of the voting stock of the Company and/or warrants or options to acquire such voting stock, calculated on a fully diluted basis, or (ii) if all or substantially all of the assets of the Company are sold or otherwise transferred to any individual, corporation, partnership, trust, association, joint venture, pool, syndicate or similar organization or group acting in concert or (iii) the Company is liquidated or dissolved or adopts a plan of liquidation or (iv) a merger consolidation or other reorganization or business combinations with any party including a leveraged buy-out or a going private transaction and where there has been a significant reduction --- in Executive's responsibilities.

6.7 Voluntary Termination-Change in Senior Management Accompanied by ---------------------------------------------------------------- Change in Business Philosophy. If the Company elects a new Chairman ----------------------------- and/or Chief Executive Officer (the "New Officer") or provided that the New Officer enacts major changes in the Company's business philosophy, mission or business strategies, the Executive may voluntarily terminate his employment. To provide sufficient time for a transfer of the Executive's responsibilities and duties, he shall be required to provide sixty (60) days notice prior to such voluntary termination and the Company shall have the option of extending the notice an additional thirty (30) days. In the event the Executive voluntarily terminates his employment in connection with or within one year after the election of a New Officer accompanied by any of the changes described in this Section 6.7, he shall not be

6<PAGE>

entitled to any severance pay and shall not be bound by the "Covenant Not to Compete" described in Section 7.

6.8 Effectiveness. In the event any of the events described in this ------------- Section 6 should occur during the term of this Agreement, and result




in payments to the Executive which would in their normal course continue beyond the term of this Agreement, such payments shall be made at such times and in such amounts as if the term of this Agreement had not expired.

7. Covenant Not to Compete. -----------------------

The covenant set forth in Section 7.1 shall be applicable for a period of one (1) year after termination in the event the Executive is terminated pursuant to Section 6.4 "Without Cause" or to Section 6.5 "Voluntary" or to Section 6.6 "Voluntary Termination -Change of Control". It shall be applicable for a period of two (2) years after termination in the event the Executive is terminated pursuant to Section 6.3 for "Cause".

7.1 Scope. During the term of Executive's employment under this ----- Agreement, and for the applicable period thereafter, Executive hereby covenants and agrees that neither he nor any affiliate (as defined hereinbelow), at any time, directly or indirectly, will (i) engage, whether as an employee or otherwise, in the Homebuilding and Mortgage Financing Business (as defined hereinbelow) on behalf of himself or any other person or entity, whether conducted individually or through an affiliate; (ii) own, acquire an interest in, manage, operate, join or control, or participate in the ownership, acquisition, management, operation or control of, or be a director, agent, representative, shareholder of more than 1% of the outstanding stock, partner, employee, officer, or consultant of, any enterprise of any kind that is engaged in the Homebuilding Business or Mortgage Financing Business; (iii) induce or attempt to induce any customer or potential customer of the Company to discontinue, in whole or in part, business, or not to do business, with the Company or (iv) hire or attempt to hire any person now or hereafter

7<PAGE>

employed by the Company.

7.2 Definitions. For purposes of this Agreement, (i) the term "affiliate" ----------- shall mean Executive, Executive's spouse, and any minor children ("immediate family") and any entity that Executive and/or any members of his immediate family control, either directly or indirectly; (ii) "control" for purposes of the immediately preceding clause shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of voting securities, by contract, or otherwise); and (iii) the term "Homebuilding Business" and "Mortgage Financing Business" shall mean the business of designing, constructing, and/or the origination, underwriting, placement or sale of residential home mortgages at any location within any Standard Metropolitan Statistical Area (as determined by the Census Bureau, Department of Commerce, United States Government) in which is located any office of the Company which has been assigned to the Executive's area of managerial responsibility at any time within the last two years of the employment of the Executive with the Company.

7.3 Reasonableness. The Executive acknowledges that the restrictions -------------- contained in this Section 7 are reasonable and necessary to protect the business and interests of the Company, and that it would be impossible to measure in money the damages that would accrue to the Company by reason of the Executive's failure to perform his obligations under this Section 7. Therefore, the Executive hereby agrees that in addition to any other remedies that the Company may have at law or at equity with respect to this Section 7, the Company shall have the right to have all obligations, undertakings, agreements, and covenants set forth herein specifically performed, and that the Company shall have the right to obtain an order of such specific performance (including preliminary and permanent injunctive




relief to prevent a breach or contemplated breach of any provision of this Section 7) in any court of the United States or any state or political subdivision thereof, without the necessity of proving actual damage; provided that the Company is not in breach of any of its obligations hereunder.

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7.4 No Waiver. No waiver by the Company of a breach of, or of a default --------- under, any of the provisions of this Agreement, nor their failure on one or more occasions, to enforce any of the provisions of this Agreement or to exercise any right or privilege hereunder shall thereafter be construed as a waiver of any subsequent breach or default of a similar nature, or as to the waiver of any such provision, rights, or privileges hereunder.

7.5 Blue-Pencilling. If any part of any provision of this Section 7 --------------- shall be determined to be invalid or unenforceable under applicable law, such part shall be ineffective to the extent of such invalidity or unenforceability only, without in any way affecting the remaining terms of such provision or the remaining provisions of this Section 7. The Executive hereby covenants and agrees that to the extent any provision or portion of this Agreement shall be held, found, or deemed to be unreasonable, unlawful, or unenforceable, then any necessary modifications shall be made (but only to such extent) so that such provision or portion hereof shall be legally enforceable to the fullest extent permitted by applicable law. The Executive further agrees and authorizes any court of competent jurisdiction to enforce any such provision or portion hereof in order that such provision or portion hereof shall be enforced by such court to the fullest extent permitted by applicable law.

7.6 Confidentiality. During the term of the Executive's employment with --------------- the Company, he will acquire information of a proprietary or confidential nature and knowledge about the operations of the Company. Accordingly, the Executive agrees not to use or to disclose to any third party, or cause to be used, in any manner, directly or indirectly, the information described immediately above. The Executive further agrees to return to the Company promptly upon the termination of the Executive's employment with the Company, and all information of a proprietary or confidential nature acquired by the Executive at any time during the course of his employment with the Company, to the extent such information has been reduced to writing, together with any and all documents and materials of any

9<PAGE>

kind then in the possession or control of the Executive which may be the property of the Company or any affiliate, whether confidential or otherwise, including any copies which may have been made by or for the Executive.

7.7 No Conflict. The Covenant Not to Compete set forth in this Section 7 ----------- shall supersede and override any and all limitations on Executive's right to compete with the Company including, without limitation, any similar covenants not to compete in the Stock Option Agreements and the Performance Share Agreements executed in conjunction with the 1993 and 1994 NVR, Inc. Management Equity Incentive Plans, 1996 and 1998 NVR, Inc. Management Long-Term Stock Option Plans and the NVR, Inc. High Performance Compensation Plans - Number 1 and 2 and shall be the sole standard by which Executive shall be bound.

8. Other Provisions. ----------------




8.1 Notices. Any notice or other communication required or which may be ------- given hereunder shall be in writing and shall be delivered personally, telegraphed, telexed, sent by facsimile transmission or sent by certified, registered or express mail, postage prepaid, and shall be deemed given when so delivered personally, telegraphed, telexed, or sent by facsimile transmission, or if mailed, four days after the date of mailing as follows:

(i) if the Company, to:

NVR, Inc. 7601 Lewinsville Road, Suite 300 McLean, Virginia 22102

(ii) if the Executive, to:

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Paul C. Saville 9616 Brookmeadow Drive Vienna, Virginia 22182

8.2 Entire Agreement. This Agreement contains the entire agreement ---------------- between the parties with respect to the subject matter hereof and supersedes all prior agreements, written or oral, with respect thereto.

8.3. Waiver and Amendments. This Agreement may be amended, modified, --------------------- superseded, cancelled, renewed or extended, and the terms and conditions hereof may be waived, only by a written instrument signed by the parties or, in the case of a waiver, by the party waiving compliance. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party of any right, power or privilege hereunder, nor any single or partial exercise of any right, power or privilege hereunder, preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder.

8.4 Governing Law. This Agreement shall be governed and construed in ------------- accordance with the laws of the Commonwealth of Virginia.

8.5 Assignability. This Agreement, and the Executive's rights and ------------- obligations hereunder, may not be assigned by the Executive. The Company shall assign this Agreement and its rights, together with its obligations, to any entity which will substantially carry on the business of the Company subject to the Executive's rights set forth in this Agreement, but the Company shall even after such assignment be fully liable to the Executive for all obligations set forth herein.

8.6 Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument.

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8.7 Headings. The headings in this Agreement are for reference purposes -------- only and shall not in any way affect the meaning or interpretation of this Agreement.

8.8 Indemnification. The Company shall indemnify the Executive and hold ---------------




him harmless for any acts or decisions made by him in good faith while performing services for the Company or its affiliates and shall use its best efforts to obtain coverage for him under an insurance policy (whether now in force or hereinafter obtained) during the term of this Agreement covering the officers and directors of the Company or its affiliates. The Company will pay all expenses including attorney's fees, actually and necessarily incurred by the Executive in connection with any appeal thereon including the cost of court settlement arising or alleged to arise from his employment by the Company.

9. Arbitration. -----------

Any controversy or claim arising out of or in connection with this Agreementshall be settled by arbitration in accordance with the rules then pertaining ofthe American Arbitration Association. Such controversies shall be submitted tothree arbitrators, one arbitrator being selected by the Company, one arbitratorbeing selected by the Executive, and the third being selected by the two soselected by the Company and the Executive or, if they cannot agree upon a third,by the American Arbitration Association. In the event that either the Companyor the Executive, within one month after any notification of any demand forarbitration hereunder, shall not have selected its arbitrator and given noticethereof by registered or certified mail to the other, such arbitrator shall beselected by the American Arbitration Association. Confirmation of any award inany such arbitration may be held in any court having jurisdiction of the personagainst whom such award is rendered. Regardless of the circumstances givingrise to the need for arbitration, until such arbitration shall be finallydetermined and ended, the base salary of the Executive pursuant to Section 3.1,subject to the provisions of Section 6, shall be paid monthly until theexpiration of the term of this Agreement, and Bonus pursuant to Section 3.2,subject to the provisions of Section 6, shall be earned and paid in accordancewith Section 3.2 until the expiration of the term of this agreement. If theresults of such

12<PAGE>

arbitration are more favorable to the position taken by the Executive than thattaken by the Company, in the opinion of the arbitrators, then all costs andexpenses incurred by the Executive in connection with such arbitration shall bepaid by the Company.

10. Effective Date. --------------

This Agreement shall be effective as of January 1, 2001.

IN WITNESS WHEREOF, The parties hereto, intending to be legally bound hereby,have executed this Agreement as of the day and year first above mentioned.

NVR, INC.

By:___________________________ ________________________________________ PAUL C. SAVILLE


<PAGE>

EXHIBIT 10.35

[EXECUTION COPY]




MASTER REPURCHASE AGREEMENT

Dated as of January 9, 2001

Between:

BEAR STEARNS MORTGAGE CAPITAL CORPORATION

and

NVR MORTGAGE FINANCE INC.

Applicability- -------------

From time to time the parties hereto may enter into transactions in whichNVR Mortgage Finance Inc. ("Seller") agrees to transfer to Bear Stearns MortgageCapital Corporation ("Buyer") Mortgage Loans against the transfer of funds byBuyer, with a simultaneous agreement by Buyer to transfer to Seller suchMortgage Loans at a date certain or on demand, against the transfer of funds bySeller. Each such transaction shall be referred to herein as a "Transaction"and shall be governed by this Agreement, as the same shall be amended from timeto time.

Definitions- -----------

"Act of Insolvency", with respect to either Buyer or Seller, (i) thecommencement by such party as debtor of any case or proceeding under anybankruptcy, insolvency, reorganization, liquidation, dissolution or similar law,or such party seeking the appointment of a receiver, trustee, custodian orsimilar official for such party or any substantial part of its property, or (ii)the commencement of any such case or proceeding against such party, or anotherseeking such an appointment, or the filing against a party of an application fora protective decree under the provisions of the Securities Investor ProtectionAct of 1970, which (A) is consented to or not timely contested by such party,(B) results in the entry of an order for relief, such an appointment, theissuance of such a protective decree or the entry of an order having a similareffect, or (C) is not dismissed within 15 days, (iii) the making by a party of ageneral assignment for the benefit of creditors, or (iv) the admission inwriting by a party of such party's inability to pay such party's debts as theybecome due;<PAGE>

"Additional Purchased Mortgage Loans", Mortgage Loans provided by Seller toBuyer pursuant to Paragraph 4(a) hereof;

(a) "Agency" shall refer to GNMA, FNMA or FHLMC, as the case may be;

(b) "Agency Security" shall refer to a GNMA Security, a FNMA Security or aFHLMC Security;

(c) "BSCI", Bear Stearns & Co. Incorporated;

"Business Day", any day other than a Saturday, Sunday and any day on which bankslocated in the State of New York are authorized or required to close forbusiness;

"Buyer's Margin Amount", with respect to any Transaction as of any date, theamount obtained by application of a percentage, agreed to by Buyer and Sellerprior to entering into the Transaction and specified in the relatedRequest/Confirmation, to the Repurchase Price for such Transaction as of suchdate;

"Custodian", the custodian named in the Custodial Agreement and any permittedsuccessor thereto;

"Custodial Agreement", the Custodial Agreement among Buyer, Seller and theCustodian providing for the custody of records relating to the PurchasedMortgage Loans;




(d) "FHA", the Federal Housing Administration;

(e) "FHLMC", the Federal Home Loan Mortgage Corporation;

(f) "FHLMC Guide", the Freddie Mac Sellers' and Servicers' Guide, as suchGuide may hereafter from time to time be amended;

(g) "FHLMC Security", a Mortgage Participation Certificate issued andguaranteed by FHLMC and backed by a pool of Mortgage Loans;

(h) "FNMA", the Federal National Mortgage Association;

(i) "FNMA Guide", the Fannie Mae MBS Selling and Servicing Guide, as suchGuide may hereafter from time to time be amended;

(j) "FNMA Security", a Guaranteed Mortgage Pass-Through Certificate issuedand guaranteed by FNMA and backed by a pool of Mortgage Loans;

(k) "GAAP", to generally accepted accounting principals consistentlyapplied.

(l) "GNMA", the Government National Mortgage Association;

(m) "GNMA Guide", the GNMA Mortgage-Backed Securities Guide, as such Guidemay hereafter from time to time be amended;

(n) "GNMA Security", a fully-modified pass-through mortgage-backedcertificate guaranteed by GNMA and backed by a pool of Mortgage Loans;

(o) "Guide", the GNMA Guide, the FNMA Guide or the FHLMC Guide, as

2<PAGE>

applicable;

"Income", with respect to any Mortgage Loan at any time, any principal thereofthen payable and all payments of interest and principal together with otherdistributions thereon or proceeds thereof;

"Loan Schedule", a schedule of Mortgage Loans identifying each Mortgage Loan:(1) in the case of all Mortgage Loans, by Seller's loan number, Mortgagor's nameand address (including the state and zip code) of the mortgaged property,whether such Mortgage Loan bears a fixed or adjustable interest rate, the loan-to-value ratio, the outstanding principal amount as of a specified date, theinitial interest rate borne by such Mortgage Loan, the original principalbalance thereof, the current scheduled monthly payment of principal andinterest, the maturity of the related Note, the property type, the occupancystatus, the appraised value, the original term to maturity and whether or notthe Mortgage Loan (including the related Note) has been modified; and (2) in thecase of adjustable rate Mortgage Loans, the interest rate borne by such MortgageLoan on the Purchase Date, the index and applicable determination date for eachadjustment period, the gross margin, the payment adjustment period (in months),months to next payment adjustment, periodic payment adjustment cap, lifetimepayment adjustment cap, lifetime payment cap, interest rate adjustment, periodicinterest adjustment cap, lifetime interest rate adjustment, cap amount paid todate, credit grade, FICO score, lien flag, prepay flag/terms, debt to incomeratio, fees charged up front and pre-tax disposable income;

"Margin Deficit", the meaning specified in Paragraph 4(a) hereof;

"Market Value", with respect to any Mortgage Loans as of any date, the fairmarket value of such Mortgage Loans on such date as determined by Buyer in itsreasonable business judgment from time to time and at such times as it may electin its sole discretion; provided, however, that a Market Value of zero shall be -------- -------assigned to (i) any Mortgage Loan that has been delinquent for at least thirty(30) days, (ii) any Mortgage Loan that has been subject to this Agreement formore than one hundred and eighty (180) days in aggregate or (iii) any MortgageLoan with respect to which there is a breach of a representation or warranty




made by Seller in this Agreement or the Custodial Agreement that materiallyadversely affects Buyer's interests hereunder;

"Mortgage", the mortgage, deed of trust or other instrument creating a first orsecond lien on an estate in fee simple interest in real property securing aNote;

"Mortgage Loan", a first lien mortgage loan on single family residentialproperty consisting of a Note secured by a Mortgage that is intended to back theAgency Security specified in the related Request/Confirmation;

"Mortgagor", the obligor on a Note;

"Note", the Note or other evidence of indebtedness evidencing the indebtednessof a Mortgagor under a Mortgage Loan;

"Price Differential", with respect to any Transaction hereunder as of any date,the aggregate amount obtained by daily application of the Pricing Rate for such

3<PAGE>

Transaction to the Purchase Price for such Transaction on a 360 day per yearbasis for the actual number of days during the period commencing on (andincluding) the Purchase Date for such Transaction and ending on (but excluding)the date of determination (reduced by any amount of such Price Differentialpreviously paid by Seller to Buyer with respect to such Transaction);

"Pricing Rate", the per annum percentage rate for determination of the PriceDifferential, which rate shall be specified in the related Request/Confirmation;

"Prime Rate", the prime rate of U.S. money center commercial banks as publishedin The Wall Street Journal;

"Purchase Date", the date with respect to each Transaction on which PurchasedMortgage Loans are sold by Seller to Buyer hereunder;

"Purchase Price", (i) on the Purchase Date, the price at which PurchasedMortgage Loans are sold by Seller to Buyer hereunder, and (ii) thereafter, suchprice decreased by the amount of any cash transferred by Seller to Buyerpursuant to Paragraph 4(a) hereof;

"Purchased Mortgage Loans", the Mortgage Loans sold by Seller to Buyer in aTransaction hereunder, and any Mortgage Loans substituted therefor in accordancewith Paragraph 9 hereof. The term "Purchased Mortgage Loans" with respect toany Transaction at any time also shall include Additional Purchased MortgageLoans delivered pursuant to Paragraph 4(a);

"Replacement Mortgage Loans", the meaning specified in Paragraph 11(e)(ii)hereof;

"Repurchase Date", the date on which Seller is to repurchase the PurchasedMortgage Loans from Buyer, including any date determined by application of theprovisions of Paragraphs 3(e) or 11 hereof;

"Repurchase Price", the price at which Purchased Mortgage Loans are to be resoldby Buyer to Seller upon termination of a Transaction, which will be determinedin each case (including Transactions terminable upon demand) as the sum of thePurchase Price and the Price Differential as of the date of such determination,increased by any amount determined by the application of the provisions ofParagraph 11 hereof;

"Request/Confirmation", the request and confirmation substantially in the formof Exhibit A hereto delivered pursuant to Paragraph 3 hereof;

(p) "Security Release Form" shall refer to (i) Freddie Mac Form 996(Warehouse Lender Release of Security Interest) in the case of a FHLMC Security,(ii) Fannie Mae Form 2004 (Security Release Certification) in the case of a FNMASecurity and (iii) Form HUD 11711A (Release of Security Interest) in the case ofa GNMA Security;




(q) "Takeout Assignment" shall refer to an assignment, substantially inthe form of Exhibit C hereto, executed by the Seller in favor of Buyer assigningall of the Seller's rights under a Takeout Commitment;

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(r) "Takeout Commitment" shall refer to a trade confirmation from theTakeout Investor to the Seller confirming the details of a forward trade betweenthe Takeout Investor and the Seller with respect to one or more AgencySecurities, which trade confirmation shall be valid, binding and in full forceand effect and relate to pools of Mortgage Loans that satisfy the "good deliverystandard" of the Public Securities Association as set forth in the PublicSecurities Association Uniform Practices Guide;

(s) "Takeout Investor" shall refer to a securities dealer or otherfinancial institution, listed in Exhibit F hereto, who has made a TakeoutCommitment. Such list may be modified from time to time by Buyer in its solediscretion, upon written notice to the Seller, or by the Seller with the writtenconsent of Buyer. Such amended list shall be delivered by the Seller to theCustodian;

(t) "VA" shall refer to the Department of Veterans Affairs.

Initiation; Request/Confirmation; Termination; Transactions Optional- --------------------------------------------------------------------

Any agreement to enter into a Transaction shall be made in writing at theinitiation of Seller. In the event that Seller desires to enter into aTransaction hereunder, Seller shall deliver to Buyer prior to 5:00 p.m., NewYork City time, on the Business Day prior to the proposed Purchase Date, aRequest/Confirmation complete in every respect except for the signature of anauthorized representative of Buyer. Buyer shall, upon its receipt and approvalthereof, promptly execute and return the signed Request/Confirmation to Seller.

The Request/Confirmation shall describe the Purchased Mortgage Loans in a mannersatisfactory to Buyer (which may be by attaching a Loan Schedule thereto),identify Buyer and Seller and set forth (i) the Purchase Date, (ii) the PurchasePrice, (iii) the Repurchase Date, unless the Transaction is to be terminable ondemand, (iv) the Pricing Rate or Repurchase Price applicable to the Transaction,and (v) any additional terms or conditions of the Transaction mutually agreeableto Buyer and Seller.

Each Request/Confirmation shall be binding upon the parties hereto unlesswritten notice of objection is given by the objecting party to the other partywithin one (1) Business Day after Buyer has delivered the completedRequest/Confirmation to Seller.

In the event of any conflict between the terms of a Request/Confirmation andthis Agreement, such Request/Confirmation shall prevail.

In the case of Transactions terminable upon demand, such demand shall be made byBuyer or Seller, no later than such time as is customary in accordance withmarket practice, by telephone or otherwise on or prior to the Business Day onwhich such termination will be effective. On the date specified in such demand,or on the date fixed for termination in the case of Transactions having a fixedterm, termination of the Transaction will be effected by resale by Buyer toSeller or its agent of the Purchased Mortgage Loans and any Income in respectthereof received by Buyer (and not previously credited or transferred to, orapplied to the obligations of, Seller hereunder) against the transfer of theRepurchase Price to

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an account of Buyer.

The adjustment mechanism and the index for any adjustable rate Mortgage Loanmust be satisfactory to Buyer in its sole discretion.

Notwithstanding any provision of this Agreement or the Custodial Agreement to




the contrary, the initiation of each Transaction is subject to the approval ofBuyer in its sole discretion. Buyer may, in its sole discretion, reject anyMortgage Loan from inclusion in a Transaction hereunder for any reason.

Margin Maintenance- ------------------

If at any time the aggregate Market Value of all Purchased Mortgage Loanssubject to all Transactions hereunder is less than the aggregate Buyer's MarginAmount for all such Transactions (a "Margin Deficit"), then Buyer may by noticeto Seller require Seller in such Transactions, at Buyer's option, to transfer toBuyer cash or additional Mortgage Loans reasonably acceptable to Buyer("Additional Purchased Mortgage Loans"), so that the cash and aggregate MarketValue of the Purchased Mortgage Loans, including any such Additional PurchasedMortgage Loans, will thereupon equal or exceed such aggregate Buyer's MarginAmount.

If the notice to be given by Buyer to Seller under subparagraph (a) above isgiven at or prior to 10:00 a.m. New York city time on a Business Day, Sellershall transfer cash or Additional Purchased Mortgage Loans to Buyer prior to theclose of business in New York City on the date of such notice, and if suchnotice is given after 10:00 a.m. New York City time, Seller shall transfer cashor Additional Purchased Mortgage Loans prior to the close of business in NewYork City on the Business Day following the date of such notice.

Any cash transferred pursuant to this Paragraph shall be held by Buyer as thoughit were Additional Purchased Mortgage Loans and, unless Buyer shall otherwiseconsent, shall not reduce the Repurchase Price of the related Transaction.

Income Payments- ---------------

Where a particular Transaction's term extends over an Income payment date on theMortgage Loans subject to that Transaction, all payments and distributions,whether in cash or in kind, made on or with respect to the Purchased MortgageLoans shall, unless otherwise mutually agreed by Buyer and Seller and so long asan Event of Default on the part of Seller shall not have occurred and becontinuing, be paid directly to Seller by the related Mortgagor. Buyer shallnot be obligated to take any action pursuant to the preceding sentence to theextent that such action would result in the creation of a Margin Deficit, unlessprior thereto or simultaneously therewith Seller transfers to Buyer, at Buyer'soption, cash or Additional Purchased Mortgage Loans sufficient to eliminate suchMargin Deficit.

(u) All payments and distributions, whether in cash or in kind, made on orwith respect to the Agency Securities shall, unless otherwise mutually agreed byBuyer and the Seller, be paid, delivered or transferred directly to BSGI asagent

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for Buyer pursuant to the instructions set forth in Exhibit __.

Security Interest- -----------------

(v) Each Transaction involving Mortgage Loans is entered into incontemplation of the issuance of one or more Agency Securities backed by therelated Mortgage Loans. The parties intend that the Seller will act as issuer orseller and/or servicer with respect to such Agency Securities, as applicable,and that each Agency Security will be issued in the name of, and delivered to orupon the order of BSCI.

(w) Although the parties intend that all Transactions hereunder be salesand purchases and not loans, in the event any such Transactions are deemed to beloans, Seller shall be deemed to have pledged to Buyer as security for theperformance by Seller of its obligations under each such Transaction, and shallbe deemed to have granted to Buyer a security interest in, all of the PurchasedMortgage Loans with respect to all Transactions hereunder and all proceedsthereof. Seller shall pay all fees and expenses associated with perfecting such




security interest including, without limitation, the cost of filing financingstatements under the Uniform Commercial Code and recording assignments ofmortgage as and when required by Buyer in its sole discretion.

Payment and Transfer- --------------------

Unless otherwise mutually agreed, all transfers of funds hereunder shall bein immediately available funds. All Mortgage Loans transferred by one partyhereto to the other party shall be transferred by notice to the Custodian to theeffect that the Custodian is now holding for the benefit of the transferee therelated documents and assignment forms delivered to it under the CustodialAgreement.

Segregation of Documents Relating to Purchased Mortgage Loans- -------------------------------------------------------------

All documents relating to Purchased Mortgage Loans in the possession ofSeller shall be segregated from other documents and securities in its possessionand shall be identified as being subject to this Agreement. Ownership of allPurchased Mortgage Loans shall pass to Buyer and nothing in this Agreement shallpreclude Buyer from engaging in repurchase transactions with the PurchasedMortgage Loans or otherwise pledging or hypothecating the Purchased MortgageLoans, but no such transaction shall relieve Buyer of its obligations to reselland transfer Purchased Mortgage Loans to Seller pursuant to the terms hereof.

Substitution- ------------

Seller may, subject to agreement with, acceptance by and upon notice toBuyer, substitute Mortgage Loans substantially similar to the Purchased MortgageLoans (the "Substitute Mortgage Loans") for any Purchased Mortgage Loans. IfSeller gives notice to the Buyer at or prior to 10:00 a.m. New York City time ona Business Day, Buyer may elect, by the close of business on the Business Daynotice is received or by the close of the next Business Day if notice is givenafter 10:00 a.m. New York City time on such day, not to accept suchsubstitution. In the event such substitution is accepted by Buyer, suchsubstitution shall be made by Seller's transfer to Buyer of such SubstituteMortgage Loans and Buyer's transfer to Seller of the Purchased Mortgage Loansfor which substitution is being made, and after such substitution, theSubstitute Mortgage Loans shall be deemed to be Purchased Mortgage Loans. Inthe event Buyer elects not to accept such substitution, Buyer shall offer Sellerthe right to

7<PAGE>

terminate the Transaction.

In the event Seller exercises its right to substitute or terminate underthis Paragraph 9, Seller shall be obligated to pay to Buyer, by the close of theBusiness Day of such substitution or termination, as the case may be, an amountequal to (A) Buyer's actual cost (including all fees, expenses and commissions)of (i) entering into replacement transactions; (ii) entering into or terminatinghedge transactions; and/or (iii) terminating transactions or substitutingsecurities in like transactions with third parties in connection with or as aresult of such substitution or termination, and (B) to the extent Buyerdetermines not to enter into replacement transactions, the loss incurred byBuyer directly arising or resulting from such substitution or termination. Theforegoing amounts shall be solely determined and calculated by Buyer in goodfaith. Upon the reasonable request of Seller, Buyer will provide reasonableevidence of the basis of its calculation of such amounts.

Delivery of Additional Documents.

(x) The Seller shall, prior to or simultaneously with the funding of eachTransaction, deliver to Buyer through the Custodian the followingdocuments:

(i) A fully executed Custody Receipt, and all other applicable documents required by the Custody Agreement; and




(ii) In the case of a Transaction involving Mortgage Loans that are intended to back an Agency Security, Takeout Assignments in blank in an amount at least equal to all Mortgage Loans subject to this Agreement.

(y) The Seller shall, within thirty (30) days of an Mortgage Loan becomingsubject to this Agreement where such Mortgage Loan is intended to back an AgencySecurity, deliver to Buyer (i) a duly authorized and originally executed TakeoutAssignment naming Buyer as the assignee, relating to a pool of Mortgage Loans ofwhich such Mortgage Loan forms a part and in form and substance satisfactory toBuyer and (ii) a copy of the related Agency Registration Form in form andsubstance satisfactory to Buyer.

(z) The Seller shall, simultaneously with the funding of the initialTransaction under this Agreement relating to each type of Agency Security andfrom time to time thereafter upon the request of Buyer, deliver to Buyerevidence of the commitment of FHLMC, FNMA or GNMA, as appropriate, pursuant towhich the related Agency Securities shall be issued.

(aa) The Seller shall deliver to Buyer on a weekly basis (or morefrequently if requested by Buyer), an investor commitment report, substantiallyin the form attached hereto as Exhibit E, listing the existing commitments ofGNMA, FHLMC and FNMA, as applicable (for securitizations) relating to alloutstanding Request/Confirmations.

(bb) Buyer, simultaneously with the funding of each Transaction involvingMortgage Loans, shall cause the Custodian to be provided with an executedSecurity Release Form appropriate for the related Agency Security indicatingthat Buyer releases its interest in the related Mortgage Loans in the case ofsecuritization of such Mortgage Loans into one or more Agency Securities, uponthe issuance of such Agency Security or Securities. Such form

8<PAGE>

shall be prepared by the Seller and provided to the Custodian on behalf of Buyerin advance of the date on which delivery thereof is required hereby. TheCustodian shall execute such form on behalf of Buyer.

Representations, Warranties and Covenants- -----------------------------------------

Buyer and Seller each represents and warrants, and shall on and as of thePurchase Date of any Transaction be deemed to represent and warrant, to theother that:

it is duly authorized to execute and deliver this Agreement, to enter into the Transactions contemplated hereunder and to perform its obligations hereunder and has taken all necessary action to authorize such execution, delivery and performance;

it will engage in such Transactions as principal (or, if agreed in writing in advance of any Transaction by the other party hereto, as agent for a disclosed principal);

the person signing this Agreement on its behalf is duly authorized to do so on its behalf (or on behalf of any such disclosed principal);

it has obtained all authorizations of any governmental body required in connection with this Agreement and the Transactions hereunder and such authorizations are in full force and effect; and

the execution, delivery and performance of this Agreement and the Transactions hereunder will not violate any law, ordinance, charter, by-law or rule applicable to it or any agreement by which it is bound or by which any of its assets are affected.

Seller represents and warrants to Buyer, and shall on and as of the PurchaseDate of any Transaction be deemed to represent and warrant, as follows:




The documents disclosed by Seller to Buyer pursuant to this Agreement are either original documents or genuine and true copies thereof;

Seller is a separate and independent corporate entity from the Custodian, Seller does not own a controlling interest in the Custodian either directly or through affiliates and no director or officer of Seller is also a director or officer of the Custodian;

None of the Purchase Price for any Mortgage Loan will be used either directly or indirectly to acquire any security, as that term is defined in Regulation T of the Regulations of the Board of Governors of the Federal Reserve System, and Seller has not taken any action that might cause any Transaction to violate any regulation of the Federal Reserve Board;

Each Mortgage Loan was underwritten in accordance with the written underwriting standards of Seller furnished by Seller to Buyer, and no change to such underwriting standards has occurred since the date of the last written revision to such standards was furnished to Buyer by Seller;

Seller shall be at the time it transfers to Buyer any Mortgage Loans for any Transaction the legal and beneficial owner of such Mortgage Loans, free of any lien, security interest, option or encumbrance; and

Seller used no selection procedures that identified the Mortgage Loans relating to a Transaction as being less desirable or valuable than other comparable assets in Seller's portfolio on the related Purchase Date.

(i) The Seller is a GNMA-approved issuer, a GNMA-approved servicer a FHA-approved mortgagee, a VA-approved lender, a FNMA-approved issuer, a FNMA-approved servicer and a FHLMC-approved seller/servicer in good standing

9<PAGE>

("Approvals");

(ii) Each Mortgage Loan conforms to the requirements and specifications (including, without limitation, all representations and warranties required in respect thereof) set forth in the GNMA Guide, FNMA Guide or FHLMC Guide, as applicable;

(iii) There exists Takeout Assignments in blank relating to Takeout Commitments for an amount of Agency Securities at least equal to the aggregate outstanding principal amount of all Mortgage Loans subject to this Agreement that are not Pooled Mortgage Loans;

(iv) Each and every document, certificate, instrument, insurance policy, escrow and any other item necessary to satisfy the final delivery requirements of FHLMC, FNMA or GNMA as required by the FHLMC Guide, the FNMA Guide or the GNMA Guide, as applicable, for the issuance of the related Agency Security are in form and substance acceptable to FHLMC, FNMA or GNMA, as appropriate, and have been delivered to the Custodian;

(v) The Seller has no notice or knowledge of any fact, event or circumstance whatsoever on the basis of which FHLMC, FNMA or GNMA, as applicable, may delay the issuance of, or refuse to issue, the related Agency Security;

(vi) Each copy of the document or documents evidencing the Agency commitment delivered to Buyer through the Custodian is a true and correct copy, and such GNMA, FHLMC or FNMA commitment has not been withdrawn, amended or supplemented except as has been theretofore disclosed to Buyer in writing;

(vii) Each Mortgage Loan that is intended to back an Agency Security conforms in all respects with all requirements of the Takeout Commitment applicable to the Agency Security to be backed by such Mortgage Loans;

(viii) Each Takeout Commitment is a legal, valid and binding obligation of the Seller enforceable against it in accordance with its




terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors' rights generally and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law);

(ix) Each Takeout Commitment is enforceable by the Seller against the related Takeout Investor;

(x) Each Takeout Commitment is, by virtue of the related Takeout Assignment, enforceable by Buyer against the related Takeout Investor; and

(xi) Each Takeout Assignment is a legal, valid and binding obligation of the Seller enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors' rights generally and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law).

Seller makes the representations and warranties set forth at Exhibit B withrespect to the Mortgage Loans as of the related Purchase Date.

Seller covenants with Buyer, from and after the date hereof, as follows:

(xii) The Seller shall immediately notify Buyer if any Approvals are withdrawn or modified;

10<PAGE>

(xiii) In the case of a Transaction involving Mortgage Loans that will back an Agency Security, the Seller shall not alter or amend the Agency Registration Form relating to such Transaction following the initial preparation thereof without the express approval of Buyer.

(xiv) Without Buyer's express prior written approval, the Seller shall not execute, in favor of any third party other than Buyer or BSGI, any assignment of rights held or purportedly held by the Seller under a Takeout Commitment;

Seller shall immediately notify Buyer if an Event of Default shall have occurred;

Seller shall deliver to Buyer a current Loan Schedule with respect to all Mortgage Loans subject to this Agreement with such frequency as Buyer may require but in no event less frequently than weekly; and

No Mortgage Loan shall be subject to this Agreement for more than one hundred and eighty (180) days in aggregate.

Seller shall, at its own expense, register the Mortgage Loans with MERS and prepare and send, or cause to be prepared and sent, for recordation an individual assignment of each Mortgage Loan to MERS in a form acceptable under the applicable Agency Guide and satisfactory to Buyer.

In the event that MERS is no longer the mortgagee of record, Seller shall assign each Mortgage to such entity as Buyer shall require, in its sole discretion.

Events of Default; Event of Termination- ---------------------------------------

The following events shall constitute events of default (each an "Event ofDefault") hereunder with respect to Buyer or Seller, as applicable:

Seller fails to repurchase or Buyer fails to transfer Purchased Mortgage Loans upon the applicable Repurchase Date pursuant to the terms hereof; Seller or Buyer fails, after one (1) Business Day's notice, to comply with Paragraph 4 hereof; An Act of Insolvency occurs with respect to Seller or Buyer or any controlling entity thereof;




Any representation or warranty made by Seller or Buyer shall have been incorrect or untrue in any material respect when made or repeated or deemed to have been made or repeated; provided, however, that in the case of -------- ------- representations and warranties made with respect to the Purchased Mortgage Loans, such circumstance shall not constitute an Event of Default if, after determining the Market Value of the Purchased Mortgage Loans without taking into account the Purchased Mortgage Loans with respect to which such circumstance has occurred, no other Event of Default shall have occurred and be continuing;

Any covenant shall have been breached in any material respect; provided, -------- however, that in the case of covenants made with respect to the Purchased ------- Mortgage Loans, such circumstance shall not constitute an Event of Default if, after determining the Market Value of the Purchased Mortgage Loans without taking into account the Purchased Mortgage Loans with respect to which such circumstance has occurred, no other Event of Default shall have occurred and be continuing;

Buyer shall have reasonably determined that Seller is or will be unable to meet its commitments under this Agreement, shall have notified Seller of such determination and Seller shall not have responded with appropriate information to the contrary to the

11<PAGE>

satisfaction of Buyer within twenty-four (24) hours;

This Agreement shall for any reason cease to create a valid, first priority security interest in any of the Purchased Mortgage Loans purported to be covered hereby;

A final judgment by any competent court in the United States of America for the payment of money in an amount of at least $100,000 is rendered against Seller, and the same remains undischarged for a period of sixty (60) days during which execution of such judgment is not effectively stayed;

Any event of default or any event which with notice, the passage of time or both shall constitute an event of default shall occur and be continuing under any repurchase or other financing agreement for borrowed funds or indenture for borrowed funds by which Seller is bound or affected shall occur and be continuing;

In the judgment of Buyer a material adverse change shall have occurred in the business, operations, properties, prospects or condition (financial or otherwise) of Seller;

Seller shall be in default with respect to any normal and customary covenants under any debt contract or agreement, any servicing agreement or any lease to which it is a party, which default could materially adversely affect the financial condition of Seller (which covenants include, but are not limited to, an Act of Insolvency of Seller or the failure of Seller to make required payments under such contract or agreement as they become due);

Seller shall fail to promptly notify Buyer of (i) the acceleration of any debt obligation or the termination of any credit facility of Seller; (ii) the amount and maturity of any such debt assumed after the date hereof; (iii) any adverse developments with respect to pending or future litigation involving Seller; and (iv) any other developments which might materially and adversely affect the financial condition of Seller; or

Seller shall have failed to comply in any material respect with its obligations under the Custodial Agreement.

If an Event of Default shall have occurred and be continuing, then, at theoption of the nondefaulting party, exercised by written notice to the defaultingparty (which option shall be deemed to have been exercised, even if no notice isgiven, immediately upon the occurrence of an Act of Insolvency), the Repurchase




Date for each Transaction hereunder shall be deemed immediately to occur.

In all Transactions in which the defaulting party is Seller, if Buyer is deemedto have exercised the option referred to in subparagraph (b) of this Paragraph,(i) Seller's obligations hereunder to repurchase all Purchased Mortgage Loans insuch Transactions shall thereupon become immediately due and payable, (ii) tothe extent permitted by applicable law, the Repurchase Price with respect toeach such Transaction shall be increased by the aggregate amount obtained bydaily application of (x) the greater of the Pricing Rate for such Transactionand the Prime Rate to (y) the Repurchase Price for such Transaction as of theRepurchase Date as determined pursuant to subparagraph (b) of this Paragraph(decreased as of any day by (A) any amounts retained by Buyer with respect tosuch Repurchase Price pursuant to clause (iii) of this subparagraph, (B) anyproceeds from the sale of Purchased Mortgage Loans pursuant to subparagraph(e)(i) of this Paragraph, and (C) any amounts credited to the account of Sellerpursuant to subparagraph (f) of this Paragraph) on a 360 day per year basis for

12<PAGE>

the actual number of days during the period from and including the date of theEvent of Default giving rise to such option to but excluding the date of paymentof the Repurchase Price as so increased, (iii) all Income paid after suchexercise or deemed exercise shall be payable to and retained by Buyer applied tothe aggregate unpaid Repurchase Prices owed by Seller, and (iv) Seller shallimmediately deliver or cause the Custodian to deliver to Buyer any documentsrelating to Purchased Mortgage Loans subject to such Transactions then inSeller's possession.

In all Transactions in which the defaulting party is Buyer, upon tender bySeller of payment of the aggregate Repurchase Prices for all such Transactions,Buyer's right, title and interest in all Purchased Mortgage Loans subject tosuch Transactions shall be deemed transferred to Seller, and Buyer shall deliveror cause the Custodian to deliver all documents relating to such PurchasedMortgage Loans to Seller.

After one (1) Business Day's notice to the defaulting party (which notice neednot be given if an Act of Insolvency shall have occurred, and which may be thenotice given under subparagraph (b) of this Paragraph or the notice referred toin clause (ii) of the first sentence of subparagraph (a) of this Paragraph), thenondefaulting party may:

as to Transactions in which the defaulting party is Seller, (A) immediately sell on a servicing released or servicing retained basis as Buyer deems desirable, in a recognized market at such price or prices as Buyer may in its sole discretion deem satisfactory, any or all Purchased Mortgage Loans subject to such Transactions and apply the proceeds thereof to the aggregate unpaid Repurchase Prices and any other amounts owing by Seller hereunder or (B) in its sole discretion elect, in lieu of selling all or a portion of such Purchased Mortgage Loans, to give Seller credit for such Purchased Mortgage Loans in an amount equal to the Market Value therefor on such date against the aggregate unpaid Repurchase Prices and any other amounts owing by Seller hereunder; and

as to Transactions in which the defaulting party is Buyer, (A) purchase mortgage loans ("Replacement Mortgage Loans") having substantially the same outstanding principal amount, maturity and interest rate as any Purchased Mortgage Loans that are not transferred by Buyer to Seller as required hereunder or (B) in its sole discretion elect, in lieu of purchasing Replacement Mortgage Loans, to be deemed to have purchased Replacement Mortgage Loans at the price therefor on such date, calculated as the average of the prices obtained from three (3) nationally recognized registered broker/dealers that buy and sell comparable mortgage loans in the secondary market.

As to Transactions in which the defaulting party is Buyer, Buyer shall be liableto Seller (i) with respect to Purchased Mortgage Loans (other than AdditionalPurchased Mortgage Loans), for any excess of the price paid (or deemed paid) bySeller for Replacement Mortgage Loans therefor over the Repurchase Price forsuch Purchased Mortgage Loans and (ii) with respect to Additional PurchasedMortgage Loans, for the price paid (or deemed paid) by Seller for the




Replacement Mortgage Loans therefor. In addition, Buyer shall be liable toSeller for interest on such remaining liability with respect to each suchpurchase (or

13<PAGE>

deemed purchase) of Replacement Mortgage Loans from the date of such purchase(or deemed purchase) until paid in full by Buyer. Such interest shall be at arate equal to the greater of the Pricing Rate for such Transaction or the PrimeRate.

For purposes of this Paragraph 11, the Repurchase Price for each Transactionhereunder in respect of which the defaulting party is Buyer shall not increaseabove the amount of such Repurchase Price for such Transaction determined as ofthe date of the exercise or deemed exercise by Seller of its option undersubparagraph (b) of this Paragraph.

The defaulting party shall be liable to the nondefaulting party for the amountof all reasonable legal or other expenses incurred by the nondefaulting party inconnection with or as a consequence of an Event of Default, together withinterest thereon at a rate equal to the greater of the Pricing Rate for therelevant Transaction or the Prime Rate. Expenses incurred in connection with anEvent of Default shall include without limitation those costs and expensesincurred by the nondefaulting party as a result of the early termination of anyrepurchase agreement or reverse repurchase agreement entered into by thenondefaulting party in connection with the Transaction then in default.

The nondefaulting party shall have, in addition to its rights hereunder, anyrights otherwise available to it under any other agreement or applicable law.

At the option of Buyer, exercised by written notice to Seller, the RepurchaseDate for any or all Transactions shall be deemed to immediately occur in theevent that the senior debt obligations or short-term debt obligations of BearStearns & Co. Inc. shall be rated below the four highest generic grades (withoutregard to any pluses or minuses reflecting gradations within such genericgrades) by any nationally recognized statistical rating organization.

The exercise by any party of remedies after the occurrence of an Event ofDefault shall be conducted in a commercially reasonable manner.

Servicing of the Purchased Mortgage Loans- -----------------------------------------

The parties hereto agree and acknowledge that, notwithstanding the purchase andsale of the Purchased Mortgage Loans contemplated hereby, Seller shall servicethe Purchased Mortgage Loans for the benefit of Buyer and, if Buyer shallexercise its rights to sell the Purchased Mortgage Loans pursuant to thisAgreement prior to the related Repurchase Date, Buyer's assigns; provided, --------however, that the obligation of Seller to service Purchased Mortgage Loans for- -------the benefit of Buyer as aforesaid shall cease upon the payment to Buyer of theRepurchase Price therefor.

The Seller shall service and administer the Mortgage Loans in accordance withprudent mortgage loan servicing standards and procedures generally accepted inthe mortgage banking industry and in accordance with the standards incorporated(with respect to the GNMA securitization program) the GNMA Guide or (withrespect to the FNMA securitization program) the FNMA Guide or (with respect tothe FHLMC securitization program) the FHLMC Guide; provided, --------

14<PAGE>

however, that the Seller shall at all times comply with applicable law and FHA- -------regulations and VA regulations so that the FHA insurance, VA guarantee or anyother applicable insurance or guarantee, if any, in respect of any Mortgage Loanis not voided or reduced. The Seller shall at all times maintain accurate and




complete records of its servicing of the Mortgage Loans. Seller will provideBuyer with monthly reports, substantially identical in form to FNMA's standardform of remittance report with respect to all Purchased Mortgage Loans theninvolved in any Transaction hereunder.

Buyer may, in its sole discretion if an Event of Default shall have occurred andbe continuing, without payment of any termination fee or any other amount toSeller, (i) sell the Mortgage Loans on a servicing released basis or (ii)terminate Seller as the servicer of the Purchased Mortgage Loans with or withoutcause.

Single Agreement- ----------------

Buyer and Seller acknowledge that, and have entered hereinto and will enterinto each Transaction hereunder in consideration of and in reliance upon thefact that, all Transactions hereunder constitute a single business andcontractual relationship and have been made in consideration of each other.Accordingly, each of Buyer and Seller agrees (i) to perform all of itsobligations in respect of each Transaction hereunder, and that a default in theperformance of any such obligations shall constitute a default by it in respectof all Transactions hereunder, (ii) that each of them shall be entitled to setoff claims and apply property held by them in respect of any Transaction againstobligations owing to them in respect of any other Transactions hereunder and(iii) that payments, deliveries and other transfers made by either of them inrespect of any Transaction shall be deemed to have been made in consideration ofpayments, deliveries and other transfers in respect of any other Transactionshereunder, and the obligations to make any such payments, deliveries and othertransfers may be applied against each other and netted.

Notices and Other Communications- --------------------------------

Except as otherwise expressly provided herein, all such notices orcommunications shall be in writing (including, without limitation, telegraphic,facsimile or telex communication) or confirmed in writing and such notices andother communications shall, when mailed, telegraphed, communicated by facsimiletransmission or telexed, be effective when received at the address for noticesfor the party to whom such notice or communications is to be given as follows:

if to Seller:

NVR Mortgage Finance Inc. 100 Ryan Court Pittsburgh, PA 15205 Attention: Barbara Bubak Telephone: (412) 429-4576 Telecopy: ____________________

if to Buyer:

Bear Stearns Mortgage Capital Corporation 245 Park Avenue New York, New York

15<PAGE>

Attention: John M. Garzone Telephone: (212) 272-3853 Telecopy: (212) 272-2053

Notwithstanding the foregoing, however, that a facsimile transmission shall bedeemed to be received when transmitted so long as the transmitting machine hasprovided an electronic confirmation of such transmission, and provided further, -------- -------however, that all financial statements delivered shall be hand-delivered or sent- -------by first-class mail. Either party may revise any information relating to it bynotice in writing to the other party, which notice shall be effective on thethird business day following receipt thereof.




Payment of Expenses- -------------------

Seller shall pay on demand all fees and expenses (including, withoutlimitation, the fees and expenses for legal services of any kind whatsoever)incurred by Buyer or the Custodian in connection with this Agreement and theCustodial Agreement and the transactions contemplated hereby and thereby,whether or not any Transactions are entered into hereunder, including, by way ofillustration and not by way of limitation, the fees and expenses incurred inconnection with (i) the preparation, reproduction and distribution of thisAgreement and the Custodial Agreement and any opinions of counsel, certificatesof officers or other documents contemplated by the aforementioned agreements and(ii) any Transaction under this Agreement; provided, however, that Seller shall -------- -------not be required to pay the fees and expenses of Buyer incurred as a result ofBuyer's default under this Agreement. The obligation of Seller to pay such feesand expenses incurred prior to or in connection with the termination of thisAgreement shall survive the termination of this Agreement.

Opinions of Counsel- -------------------

Seller shall, on the Purchase Date of the first Transaction hereunder and,upon the request of Buyer, on the Purchase Date of any subsequent Transaction,cause to be delivered to Buyer, with reliance thereon permitted as to any personor entity that purchases the Mortgage Loans from Buyer in a repurchasetransaction, a favorable opinion of counsel with respect to the matters setforth in Exhibit G hereto, in form and substance acceptable to Buyer and itscounsel.

Further Assurances; Additional Information- ------------------------------------------

Seller shall promptly provide such further assurances or agreements as Buyer mayrequest in order to effect the purposes of this Agreement.

At any reasonable time, Seller shall permit Buyer, its agents or attorneys, toinspect and copy any and all documents and data in its possession pertaining toeach Purchased Mortgage Loan that is the subject of such Transaction. Suchinspection shall occur upon the request of Buyer at a mutually agreeablelocation during regular business hours and on a date not more than two (2)Business Days after the date of such request.

Seller agrees to provide Buyer or its agents, from time to time, with suchinformation concerning Seller of a financial or operational nature as Buyer mayreasonably request.

Seller shall provide Buyer or its agents, with copies of all filings made by oron

16<PAGE>

behalf of Seller or any entity that controls Seller, with the Securities andExchange Commission pursuant to the Securities Exchange Act of 1934, as amended,promptly upon making such filings.

Buyer as Attorney-in-Fact- -------------------------

Buyer is hereby appointed the attorney-in-fact of Seller for the purpose ofcarrying out the provisions of this Agreement and taking any action andexecuting any instruments that Buyer may deem necessary or advisable toaccomplish the purposes hereof, which appointment as attorney-in-fact isirrevocable and coupled with an interest. Without limiting the generality ofthe foregoing, Buyer shall have the right and power during the occurrence andcontinuation of any Event of Default to receive, endorse and collect all checksmade payable to the order of Seller representing any payment on account of theprincipal of or interest on any of the Purchased Mortgage Loans and to give fulldischarge for the same.




Appointment of Agent- --------------------

Buyer hereby appoints Bear Stearns Mortgage Capital Corporation as itsagent for purposes of issuing Requests/Confirmations, determining Market Value,exercising Buyer's rights under any margin maintenance provision of thisAgreement and such other purposes as Buyer may direct. The appointment of suchagent shall not relieve Buyer of its obligations hereunder.

Wire Instructions- -----------------

Any amounts to be transferred by Buyer to Seller hereunder shall be sent by wiretransfer in immediately available funds to the account of Seller at:

US BANK, N.A. ABA No. 091000022 Ref.: NVR Mortgage Collateral Account Acct. No. 104756234357

Any amounts to be transferred by Seller to Buyer hereunder shall be sent by wiretransfer in immediately available funds to the account of Buyer at:

BANK ONE, NATIONAL ASSOCIATION Acct. No.: 5801230 ABA. No.: 071000013 Attn: John Garzone

Amounts received after 3:00 p.m., New York City time, on any Business Day shallbe deemed to have been paid and received on the next succeeding Business Day.

Entire Agreement; Severability- ------------------------------

This Agreement shall supersede any existing agreements between the partiescontaining general terms and conditions for repurchase transactions. Eachprovision and agreement herein shall be treated as separate and independent fromany other provision or agreement herein and shall be enforceable notwithstandingthe unenforceability of any such other provision or agreement.

17<PAGE>

Non-assignability; Termination- ------------------------------

The rights and obligations of the parties under this Agreement and under anyTransaction shall not be assigned by either party without the prior writtenconsent of the other party. Subject to the foregoing, this Agreement and anyTransactions shall be binding upon and shall inure to the benefit of the partiesand their respective successors and assigns.

This Agreement and all Transactions outstanding hereunder shall terminateautomatically without any requirement for notice on the date occurring threehundred and sixty-four (364) days after the date as of which this Agreement isentered into; provided, however, that this Agreement and any Transactionoutstanding hereunder may be extended by mutual agreement of Buyer and Seller;and provided further, however, that no such party shall be obligated to agree tosuch an extension.

Counterparts- ------------

This Agreement may be executed in any number of counterparts, each of whichcounterparts shall be deemed to be an original, and such counterparts shallconstitute but one and the same instrument.

Governing Law- -------------




This Agreement shall be governed by the laws of the State of New Yorkwithout giving effect to the conflict of law principles thereof.

No Waivers, Etc.- ----------------

No express or implied waiver of any Event of Default by either party shallconstitute a waiver of any other Event of Default and no exercise of any remedyhereunder by any party shall constitute a waiver of its right to exercise anyother remedy hereunder. No modification or waiver of any provision of thisAgreement and no consent by any party to a departure herefrom shall be effectiveunless and until such shall be in writing and duly executed by both of theparties hereto. Without limitation on any of the foregoing, the failure to givea notice pursuant to subparagraph 4(a) hereof will not constitute a waiver ofany right to do so at a later date.

Use of Employee Plan Assets- ---------------------------

If assets of an employee benefit plan subject to any provision of the EmployeeRetirement Income Security Act of 1974 ("ERISA") are intended to be used byeither party hereto (the "Plan Party") in a Transaction, the Plan Party shall sonotify the other party prior to the Transaction. The Plan Party shall representin writing to the other party that the Transaction does not constitute aprohibited transaction under ERISA or is otherwise exempt therefrom, and theother party may proceed in reliance thereon but shall not be required so toproceed.

Subject to the last sentence of subparagraph (a) of this Paragraph, any suchTransaction shall proceed only if Seller furnishes or has furnished to Buyer itsmost recent available audited statement of its financial condition and its mostrecent subsequent unaudited statement of its financial condition.

18<PAGE>

By entering into a Transaction pursuant to this Paragraph, Seller shall bedeemed (i) to represent to Buyer that since the date of Seller's latest suchfinancial statements, there has been no material adverse change in Seller'sfinancial condition which Seller has not disclosed to Buyer, and (ii) to agreeto provide Buyer with future audited and unaudited statements of its financialcondition as they are issued, so long as it is a Seller in any outstandingTransaction involving a Plan Party.

Intent- ------

The parties intend and acknowledge that each Transaction is a "repurchaseagreement" as that term is defined in Section 101 of Title 11 of the UnitedStates Code, as amended (except insofar as the type of Mortgage Loans subject tosuch Transaction or the term of such Transaction would render such definitioninapplicable), and a "securities contract" as that term is defined in Section741 of Title 11 of the United States Code, as amended.

It is understood that either party's right to liquidate Mortgage Loans deliveredto it in connection with Transactions hereunder or to exercise any otherremedies pursuant to Paragraph 11 hereof, is a contractual right to liquidatesuch Transaction as described in Sections 555 and 559 of Title 11 of the UnitedStates Code, as amended.

Disclosure Relating to Certain Federal Protections- --------------------------------------------------

The parties acknowledge that they have been advised that:

(a) in the case of Transactions in which one of the parties is a broker or dealer registered with the Securities and Exchange Commission ("SEC") under Section 15 of the Securities Exchange Act of 1934 ("1934 Act"), the Securities Investor Protection Corporation has taken the position that the provisions of the Securities Investor Protection Act of 1970 ("SAPPY") do not protect the other party with respect to any




Transaction hereunder;

(b) in the case of Transactions in which one of the parties is a government securities broker or a government securities dealer registered with the SEC under Section 15C of the 1934 Act, SAPPY will not provide protection to the other party with respect to any Transaction hereunder; and

(c) in the case of Transactions in which one of the parties is a financial institution, funds held by the financial institution pursuant to a Transaction hereunder are not a deposit and therefore are not insured by the Federal Deposit Insurance Corporation, the Federal Savings and Loan Insurance Corporation or the National Credit Union Share Insurance Fund, as applicable.

BEAR STEARNS MORTGAGE CAPITAL NVR MORTGAGE FINANCE INC. CORPORATION

By: ____________________________ By: ___________________________

19<PAGE>

Title: __________________________ Title: _______________________

Date: ___________________________ Date: ________________________

20<PAGE>

EXHIBIT A

REQUEST/CONFIRMATION

TO: NVR Mortgage Finance Inc. 100 Ryan Court Pittsburgh, PA 15205 Attention: Barbara Bubak

FROM: Bear Stearns Mortgage Capital Corporation

RE: Request/Confirmation under Master Repurchase Agreement, dated as of January 9, 2001, between Bear Stearns Mortgage Capital Corporation and NVR Mortgage Finance Inc.

AGENCY (Check one): FNMA FHLMC GNMA

Bear Stearns Mortgage Capital Corporation ("Buyer") is pleased to confirm yoursale and its purchase of the Mortgage Loans described below and listed on theattached Loan Schedule pursuant to the above-referenced Master RepurchaseAgreement under the following terms and conditions:

Additional Aggregate

ORIG. PRINCIPAL AMOUNT OF MORTGAGE LOANS: _____________

CURRENT PRINCIPAL AMOUNT OF MORTGAGE LOANS: _____________

PURCHASE DATE: ____________ _____________

REPURCHASE DATE: ____________ _____________

PURCHASE PRICE: ____________ _____________

PRICING RATE: ____________ _____________

MINIMUM REQUIRED MARGIN PERCENTAGE: ____________ _____________

PRICE DIFFERENTIAL DUE DATE: ____________ _____________




A-1<PAGE>

The Master Repurchase Agreement is incorporated by reference into thisRequest/Confirmation and made a part hereof as if it were fully set forthherein. All capitalized terms used herein but not otherwise defined shall havethe meanings specified in the Master Repurchase Agreement.

BEAR STEARNS MORTGAGE CAPITAL CORPORATION

BY: ___________________________ NAME:__________________________ TITLE:_________________________

A-2<PAGE>

ATTACHMENT I

TO EXHIBIT A

REQUEST/CONFIRMATION FOR MORTGAGE LOANS =======================================

Request No. ___

Date: ________

<TABLE><CAPTION> Amount Funded to Product Wire Loan Borrower Loan Purchase Qualified Market Takeout Note Commitment Takeout Maturity Investor Type Date Number Last Amount Price Originator Value Date Rate Number Price Date- ----------- ------- ---- ------ -------- ------ -------- ---------- ------ ------- ---- ---------- ------- --------<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>

TOTALS:</TABLE>


By: ____________________________________________________Title: _________________________________________________Date:___________________________________________________

Amount to be$ ________________ funded by Buyer:

A-1<PAGE>

EXHIBIT B

REPRESENTATIONS AND WARRANTIES




RELATING TO THE PURCHASED MORTGAGE LOANS

(i) The information with respect to each Mortgage Loan set forth in therelated Loan Schedule is true and correct;

(ii) All documentation required to be delivered to the Custodian underthe Custodial Agreement has been so delivered;

(iii) Each Purchased Mortgage Loan is a Mortgage;

(iv) Each mortgaged property is improved by a single (one-to-four)family residential dwelling;

(v) No more than 5% by original principal balance of the PurchasedMortgage Loans had loan-to-value ratios in excess of 85%, except for thosePurchased Mortgage Loans which are FHA Loans, which had loan-to-value ratios ofno more than 100%;

(vi) Each Purchased Mortgage Loan is being serviced by Seller inaccordance with the terms of this Agreement;

(vii) The Note related to each Purchased Mortgage Loan bears a fixed oradjustable interest rate;

(viii) Each Mortgage is a valid and subsisting first of record (or is inthe process of being recorded) on the mortgaged property subject in all cases tothe exceptions to title set forth in the title insurance policy or attorney'sopinion of title, with respect to the related Mortgage Loan, which exceptionsare generally acceptable to banking institutions in connection with theirregular mortgage lending activities, and such other exceptions to which similarproperties are commonly subject and which do not individually, or in theaggregate, materially and adversely affect the benefits of the security intendedto be provided by such Mortgage;

(ix) Immediately prior to the transfer and assignment of the MortgageLoans by Seller to Buyer as contemplated by this Agreement, Seller held good andindefeasible title to, and was the sole owner of, each Mortgage Loan (includingthe related Note) conveyed by Seller subject to no liens, charges, mortgages,encumbrances or rights of others or other liens which will be releasedsimultaneously with such transfer and assignment; and immediately upon thetransfer of the Purchased Mortgage Loans as contemplated in this Agreement,Buyer will be the sole owner of each Purchased Mortgage Loan subject to noliens, charges, mortgages, encumbrances or rights of others except as set forthin paragraph (ix) or other liens which will be released simultaneously with suchtransfer;

B-1<PAGE>

(x) No Purchased Mortgage Loan is thirty (30) days or more delinquent;

(xi) There is no delinquent tax or assessment lien on any mortgagedproperty, and each mortgaged property is free of substantial damage and is ingood repair;

(xii) There is no valid and enforceable offset, defense or counterclaimto any Note or Mortgage, including the obligation of the related Mortgagor topay the unpaid principal of or interest on such Note;

(xiii) There is no mechanics' lien or claim for work, labor or materialaffecting any mortgaged property which is or may be a lien prior to, or equalwith, the lien of the related Mortgage except those which are insured against byany title insurance policy referred to in paragraph (xvi) below;

(xiv) Each Purchased Mortgage Loan at the time it was made complied inall material respects with applicable state and federal laws and regulations,including, without limitation, the federal Truth-in-Lending Act (including theRiegle Community Development Act of 1994) and other consumer protection laws,usury, equal credit opportunity, disclosure and recording laws;

(xv) With respect to each Purchased Mortgage Loan either (a) an




attorney's opinion of title has been obtained but no title policy has beenobtained or (b) a lender's title insurance policy, issued in standard AmericanLand Title Association form by a title insurance company authorized to transactbusiness in the state in which the related mortgaged property is situated, in anamount at least equal to the original balance of such Purchased Mortgage Loan,insuring the mortgagee's interest under the related Mortgage Loan as the holderof a valid first mortgage lien of record on the real mortgaged propertydescribed in the related Mortgage, as the case may be, subject only toexceptions of the character referred to in paragraph (ix) above, was effectiveon the date of the origination of such Mortgage Loan, and such policy is validand thereafter such policy shall continue in full force and effect;

(xvi) The improvements upon each mortgaged property are covered by avalid and existing hazard insurance policy with a carrier generally acceptableto Seller that provides for fire and extended coverage representing coverage notless than the least of (A) the outstanding principal balance of the relatedPurchased Mortgage Loan, (B) the minimum amount required to compensate fordamage or loss on a replacement cost basis or (C) the full insurable value ofthe mortgaged property;

(xvii) If any mortgaged property is in an area identified in the FederalRegister by the Federal Emergency Management Agency as having special floodhazards, a flood insurance policy in a form meeting the requirements of thecurrent guidelines of the Flood Insurance Administration is in effect withrespect to such mortgaged property with a carrier generally acceptable to Sellerin an amount representing coverage not less than the least of (A) theoutstanding principal balance of the related Purchased Mortgage Loan, (B) theminimum amount required to compensate for damage or loss on a replacement costbasis or (C) the maximum amount of insurance that is available under the FloodDisaster Protection Act of 1973;

B-2<PAGE>

(xviii) Each Mortgage and Note is the legal, valid and binding obligationof the maker thereof and is enforceable in accordance with its terms, exceptonly as such enforcement may be limited by bankruptcy, insolvency,reorganization, moratorium or other similar laws affecting the enforcement ofcreditors' rights generally and by general principles of equity (whetherconsidered in a proceeding or action in equity or at law), and all parties toeach Purchased Mortgage Loan had full legal capacity to execute all documentsrelating to such Mortgage Loan and convey the estate therein purported to beconveyed;

(xix) Seller has caused and will cause to be performed any and all actsrequired to be performed to preserve the rights and remedies of Buyer in anyinsurance policies applicable to any Purchased Mortgage Loans transferred bySeller including, without limitation, any necessary notifications of insurers,assignments of policies or interests therein, and establishments of co-insured,joint loss payee and mortgagee rights in favor of Buyer;

(xx) No more than 10% of the aggregate original outstanding principalbalance will be secured by mortgaged properties located within any single zipcode area;

(xxi) Each original Mortgage was recorded or is in the process of beingrecorded, and all subsequent assignments of the original Mortgage have beenregistered with MERS and have been prepared and delivered for recordation withMERS. In the event that MERS is not being used, all subsequent assignments ofthe original Mortgage have been prepared and delivered for recordation or havebeen recorded in the appropriate jurisdictions wherein such recordation isnecessary to perfect the lien thereof as against creditors of or purchasers fromSeller;

(xxii) The terms of each Note and each Mortgage have not been impaired,altered or modified in any respect, except by a written instrument which hasbeen recorded, if necessary, to protect the interest of Buyer and which has beendelivered to the Custodian. The substance of any such alteration or modificationis reflected on the related Loan Schedule;

(xxiii) The proceeds of each Purchased Mortgage Loan have been fully




disbursed, and there is no obligation on the part of the mortgagee to makefuture advances thereunder; any and all requirements as to completion of any on-site or off-site improvements and as to disbursements of any escrow fundstherefor have been complied with; all costs, fees and expenses incurred inmaking or closing or recording such Mortgage Loans were paid;

(xxiv) The related Note is not and has not been secured by any collateral,pledged account or other security except the lien of the corresponding Mortgage;

(xxv) No Purchased Mortgage Loan has a shared appreciation feature, orother contingent interest feature;

(xxvi) Each mortgaged property is located in the state identified in therespective Loan Schedule and consists of one or more parcels of real mortgagedproperty with a residential dwelling erected thereon;

B-3<PAGE>

(xxvii) Each Mortgage contains a provision for the acceleration of thepayment of the unpaid principal balance of the related Purchased Mortgage Loanin the event the related mortgaged property is sold without the prior consent ofthe mortgagee thereunder;

(xxviii) Any advances made after the date of origination of a PurchasedMortgage Loan have been consolidated with the outstanding principal amountsecured by the related Mortgage, and the secured principal amount, asconsolidated, bears a single interest rate and single repayment term reflectedon the respective Loan Schedule; the consolidated principal amount does notexceed the original principal amount of the related Purchased Mortgage Loan; noNote permits or obligates Seller to make future advances to the relatedMortgagor at the option of the Mortgagor;

(xxix) There is no proceeding pending or threatened for the total orpartial condemnation of any mortgaged property, nor is such a proceedingcurrently occurring, and each mortgaged property is undamaged by waste, fire,water, flood, earthquake or earth movement;

(xxx) All of the improvements which were included for the purposes ofdetermining the appraised value of any mortgaged property lie wholly within theboundaries and building restriction lines of such mortgaged property, and noimprovements on adjoining properties encroach upon such mortgaged property, andare stated in the title insurance policy and affirmatively insured;

(xxxi) No improvement located on or being part of any mortgaged propertyis in violation of any applicable zoning law or regulation; all inspections,licenses and certificates required to be made or issued with respect to alloccupied portions of each mortgaged property and, with respect to the use andoccupancy of the same, including but not limited to certificates of occupancyand fire underwriting certificates, have been made or obtained from theappropriate authorities and such mortgaged property is lawfully occupied underthe applicable law;

(xxxii) With respect to each Mortgage constituting a deed of trust, atrustee, duly qualified under applicable law to serve as such, has been properlydesignated and currently so serves and is named in such Mortgage, and no fees orexpenses are or will become payable by the owner of the Mortgage Loan to thetrustee under the deed of trust, except in connection with a trustee's saleafter default by the related Mortgagor;

(xxxiii) Each Mortgage contains customary and enforceable provisions whichrender the rights and remedies of the holder thereof adequate for therealization against the related mortgaged property of the benefits of thesecurity, including (A) in the case of a Mortgage designated as a deed of trust,by trustee's sale and (B) otherwise by judicial foreclosure. There is nohomestead or other exemption other than any applicable Mortgagor redemptionrights available to the related Mortgagor which would materially interfere withthe right to sell the related mortgaged property at a trustee's sale or theright to foreclose the related Mortgage;

(xxxiv) There is no default, breach, violation or event of acceleration




existing under any Mortgage or the related Note and no event which, with thepassage of time or with notice and the

B-4<PAGE>

expiration of any grace or cure period, would constitute a default, breach,violation or event of acceleration; and Seller has not waived any default,breach, violation or event of acceleration;

(xxxv) No instrument of release or waiver has been executed inconnection with any Purchased Mortgage Loan, and no Mortgagor has been released,in whole or in part, except in connection with an assumption agreement which hasbeen approved by the primary mortgage guaranty insurer, if any, and which hasbeen delivered to the Custodian;

(xxxvi) Each Purchased Mortgage Loan was originated based upon a fullappraisal, which included an interior inspection of the subject mortgagedproperty unless such Mortgage Loan was subject to FNMA or FHLMC underwritingguides, in which case the Purchased Mortgage Loan conformed to such guidelines;

(xxxvii) No more than 15% of the aggregate original outstanding principalbalance is secured by mortgaged properties that are non-owner occupied mortgagedproperties (i.e., investor-owned and vacation);

(xxxviii) There do not exist any hazardous substances, hazard wastes orsolid wastes, as such terms are defined in the Comprehensive EnvironmentalResponse Compensation and Liability Act, the Resource Conservation and RecoveryAct of 1976, or other federal, state or local environmental legislation on anymortgaged property;

(xxxix) Seller was properly licensed or otherwise authorized, to theextent required by applicable law, to originate or purchase each PurchasedMortgage Loan; and the consummation of the transactions herein contemplated,including, without limitation, the ownership of the Purchased Mortgage Loans byBuyer will not involve the violation of such laws;

(xl) With respect to each mortgaged property subject to a ground lease(i) the current ground lessor has been identified and all ground rents whichhave previously become due and owing have been paid; (ii) the ground lease termextends, or is automatically renewable, for at least five (5) years beyond thematurity date of the related Purchased Mortgage Loan; (iii) the ground lease hasbeen duly executed and recorded; (iv) the amount of the ground rent and anyincreases therein are clearly identified in the lease and are for predeterminedamounts at predetermined times; (v) the ground rent payment is included in themortgagor's monthly payment as an expense item in determining the qualificationof the mortgagor for such Mortgage Loan; (vi) Buyer has the right to curedefaults on the ground lease; and (vii) the terms and conditions of theleasehold do not prevent the free and absolute marketability of the mortgagedproperty. The outstanding principal balance of Purchased Mortgage Loans withrelated mortgaged properties subject to ground leases does not exceed 10% of theaggregate original outstanding principal balance;

(xli) Seller has not received a notice of default of any first-lienMortgage Loan secured by any mortgaged property which has not been cured by aparty other than Seller;

B-5<PAGE>

(xlii) No Purchased Mortgage Loan is subject to a temporary rate reductionpursuant to a buydown program;

(xliii) No more than 10% of the aggregate original outstanding principalbalance of the Purchased Mortgage Loans was originated under Seller's non-incomeverification program; and

(xliv) The interest rate on each Purchased Mortgage Loan is calculated onthe basis of a year of 360 days with twelve 30-day months.

(xlv) Each Mortgage Loan that is not a FHA Loan or VA Loan with an LTV in




excess of 80% is covered by a Primary Mortgage Insurance Policy which isdisclosed on the Mortgage Loan Schedule attached hereto, and the PrimaryMortgage Insurance Policy is in full force and effect.

(xlvi) With respect to each Mortgage Loan that is a FHA Loan or a VA Loanis indicated as such on the Mortgage Loan Schedule; the Mortgage Loan is fullyinsured by FHA or guaranteed by the VA, as applicable; the FHA insurance or VAguarantee is in full force and effect; no FHA Loan or VA Loan is subject to anydefect which would diminish or impair such insurance or guarantee; all priortransfers, if any, of any FHA Loan or VA Loan have been, and the sale to thePurchaser of any such FHA Loan or VA Loan is, in compliance with applicable lawand the regulations; and no circumstances exist with respect to any such FHALoan or VA Loan which would permit FHA or VA to deny the effectiveness of itsinsurance or guarantee.

(xlvii) In servicing and administering any FHA Loan or VA Loan, the Sellerhas complied with applicable law and regulations, as the same may be amendedfrom time to time, and has promptly discharged all obligations of the mortgageethereunder and under the related Mortgage including the timely giving of noticesthereunder; the full benefit of the insurance or guarantee, as the case may be,shall inure to the Purchaser; and no reduction or curtailment of principal,interest or any fees, costs or expenses to be paid by the FHA or VA under theinsurance contract or guarantee shall result from any act or omission of theSeller.

B-6<PAGE>

EXHIBIT C ---------

[TAKEOUT ASSIGNMENT]

___________________("Takeout Investor")(Address)Attention: _____________________

Gentlemen:

Attached hereto is a correct and complete copy of your confirmation ofcommitment (the "Commitment"), trade-dated ____________, 19__, to purchase$______________ of ____% ____ year:

(Check Box)

(a) Government National Mortgage Association;

(b) Federal National Mortgage Association; or

(c) Federal Home Loan Mortgage Corporation;

mortgage-backed pass-through securities ("Securities") at a purchase price of_____________ from __________________. This is to confirm that (i) theCommitment is in full force and effect, (ii) the Commitment has been assigned to_____________________ ("Assignee") whose acceptance of such assignment isindicated below, (iii) you will accept delivery of such Securities directly fromAssignee and (iv) you will pay Assignee for such Securities. Payment will bemade "delivery versus payment (DVP)" to Assignee in immediately available funds.Assignee shall have the right to require you to fulfill your obligation topurchase the Securities.

Notwithstanding the foregoing, the obligation to deliver the Securities toyou shall be that of NVR Mortgage Finance Inc. and your sole recourse for thefailure of such delivery shall be against NVR Mortgage Finance Inc..

C-1<PAGE>

If you have any questions, please call ______________________ of theAssignee at __________________ immediately.




Very truly yours,


By:____________________ Title:_________________ Date:__________________

Agreed to:

[ASSIGNEE]

By:_____________________Title:__________________Date:___________________

C-2<PAGE>

EXHIBIT D ---------

PAYMENT INSTRUCTIONS FOR AGENCY SECURITIES ==========================================

FED FNMA AND FHLMC SECURITY INSTRUCTIONS: __________________

__________________

PTC GNMA SECURITY INSTRUCTIONS: __________________

D-1<PAGE>

EXHIBIT E ---------

INVESTOR COMMITMENT REPORT ==========================

Mortgage Loans (Securitization) --------------

<TABLE><CAPTION> Confirmation/ Takeout Investor Funding Request Trade or Purchasing Delivery MBS Note/Coupon Delivery Trade Commitment (Listed by Number) Date Agency Month Type Rate Price Amount Number Number Reason ------------------ ----- ---------------- ----- ---- ----------- -------- ------ ------ ---------- ------ <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C></TABLE>

E-1<PAGE>

EXHIBIT F ---------

TAKEOUT INVESTORS -----------------

F-1<PAGE>




EXHIBIT G

OPINION OF COUNSEL TO SELLER

1. Seller is duly organized and validly existing as a corporation in goodstanding under the laws of the State of __________ and has power and authorityto enter into and perform its obligations under this Agreement and the CustodialAgreement. Seller is duly qualified to do business and is in good standing ineach jurisdiction in which the character of the business transacted by itrequires such qualification and in which the failure so to qualify would have amaterial adverse effect on the business, properties, assets or condition(financial or other) of Seller and its subsidiaries, considered as a whole.

2. This Agreement and the Custodial Agreement have each been dulyauthorized, executed and delivered by Seller, and each constitutes a valid andlegally binding obligation of Seller enforceable against Seller in accordancewith its terms, subject, as to enforcement, to bankruptcy, insolvency,reorganization and other laws of general applicability relating to or affectingcreditors' rights generally and to general equity principles.

3. No consent, approval, authorization or order of any state or federalcourt or government agency or body is required to be obtained by Seller for theconsummation of the transactions contemplated by this Agreement or the CustodialAgreement.

4. The consummation of any of the transactions contemplated by thisAgreement and the Custodial Agreement will not conflict with, result in a breachof, or constitute a default under the articles of incorporation or bylaws ofSeller or the terms of any indenture or other agreement or instrument known tous to which Seller is party or bound, or any order known to such counsel to beapplicable to Seller or any regulations applicable to Seller, of any state orfederal court, regulatory body, administrative agency, governmental body orarbitrator having jurisdiction over Seller.

5. There is no pending or threatened action, suit or proceeding beforeany court or governmental agency, authority or body or any arbitrator involvingSeller or relating to the transaction contemplated by this Agreement or theCustodial Agreement which, if adversely determined, would have a materialadverse effect on Buyer.

6. Seller is duly registered as a finance company in each state in whichMortgage Loans were originated, to the extent such registration is required byapplicable law.

Each Mortgage Loan will have been endorsed in a manner which satisfies anyrequirement of endorsement in order to transfer all right, title and interest inand to that Mortgage Loan from Seller to Buyer. Each assignment of Mortgagerelated to each such Mortgage Loan is in recordable form and is sufficient underapplicable law to validly and effectively transfer all right, title and interestof Seller to Buyer. This Agreement together with (a) the delivery of suchrelated Mortgage Loans to Custodian, (b) the endorsement of such Mortgage Loansto Buyer and (c) the delivery of the

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assignments of Mortgages related to the Mortgage Loans to the Custodian inrecordable form assigning such Mortgages to Buyer, creates a valid, perfectedsecurity interest in such Mortgage Loans in favor of Buyer. Such securityinterest will have the same priority and will be subject to the same securityinterests and liens as apply to such Mortgage Loans in the hands of Seller.

EXHIBIT 10.36

SECOND AMENDMENT TO LOAN AGREEMENT AND SECOND AMENDMENT TO PLEDGE AND SECURITY AGREEMENT




THIS SECOND AMENDMENT TO LOAN AGREEMENT AND SECOND AMENDMENT TO PLEDGE ANDSECURITY AGREEMENT (the "Amendment") dated as of September 1, 2000 between NVRMORTGAGE FINANCE, INC., a Virginia corporation ("Borrower"), the Lenders party --------to the Loan Agreement referred to below ("Lenders"), and U.S. BANK NATIONALASSOCIATION, as agent ("Agent") for the Lenders.

WITNESSETH THAT:

WHEREAS, the Borrower, the Lenders and the Agent are parties to a LoanAgreement dated as of September 7, 1999, as amended by a Consent, Waiver andFirst Amendment to Loan Agreement dated as of November 19, 1999 (as so amended,the "Loan Agreement"), pursuant to which the Lenders provide the Borrower with arevolving mortgage warehousing credit facility;

WHEREAS, the Borrower and the Lenders have agreed to amend the LoanAgreement upon the terms and conditions herein set forth;

NOW, THEREFORE, for value received, the receipt and sufficiency of whichare hereby acknowledged, the Borrower and the Lenders agree as follows:

1. Certain Defined Terms. Each capitalized term used herein without being ---------------------defined herein that is defined in the Loan Agreement shall have the meaninggiven to it therein.

2. Amendments to Loan Agreement. The Loan Agreement is hereby amended as ----------------------------follows:

(a) The definition of "Eligible Mortgage Loan" in Section 1.1 of the ---------------------- Loan Agreement is hereby amended to (i) add "or REO" before the colon at the end of the second line thereof, (ii) amend clauses (h) and (k) thereof in their entirety to read as follows:

(h) which, except in the case of an Investment Mortgage Loan or REO, has not previously been sold to an Investor and repurchased by Borrower;

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(k) except in the case of an Investment Mortgage Loan or REO, with respect to which no more than 180 days have elapsed since the original funding of such Mortgage Loan to the Mortgagor;

(iii) add "or REO" after "Investment Loan" each place it appears therein, (iv) delete the word "and" at the end of clause (o) thereof, (v) delete the period at the end of clause (p) thereof and substitute "; and" therefor, and (vi) add the following clause (q) after clause (p) thereof:

(q) in connection with which, in the case of an Investment Mortgage Loan that has been converted to REO, the requirements of Section 4.08 of the Pledge and Security Agreement have been satisfied.

(b) The definition of "Scheduled Termination Date" in Section 1.1 of -------------------------- the Loan Agreement is hereby amended in its entirety to read as follows:

"Scheduled Termination Date" means August 31, 2001. --------------------------

(c) The definition of Swing Advance Limit" in Section 1.1 of the Loan ------------------- Agreement is hereby amended in its entirety to read as follows:

"Swing Advance Limit" means $45,000,000. -------------------

(d) Section 2.1(g) of the Loan Agreement is hereby amended in its




entirety read as follows:

(g) Increases. Borrower may from time to time request any Lender --------- to increase its Commitment, provided that the total Commitment may be increased to no more than $125,000,000. That increase must be effected by an amendment executed by Borrower, Agent, and the increasing Lender. Borrower shall execute and deliver to each such Lender a Committed Warehouse Note in the stated amount of its new Commitment. No Lender is obligated to increase its Commitment under any circumstances, and no Lender's Commitment may be increased except by its execution of an amendment as stated above. Each new Lender providing such additional Commitment increase shall be a "Lender" hereunder, entitled to the rights and benefits, and subject to the duties, of a Lender under the Loan Documents. All amounts advanced hereunder pursuant to any such additional Commitment shall be secured by the Collateral on a pari passu basis with all other amounts advanced hereunder. In the event the total Commitment is increased, Borrower shall notify each Lender in writing of such increase. In the case of a Commitment increase, each Lender's Commitment Percentage shall be recalculated to reflect the new proportionate share of the revised total Commitments and the Lender holding an additional Commitment shall, immediately upon receiving notice from Agent, pay to the Agent an amount equal to its pro rata share of the Borrowings outstanding as of such date. All such

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payments shall reduce ratably the outstanding principal balance of the Committed Warehouse Notes, shall be distributed by the Agent to the Lenders for application accordingly, and shall represent Borrowings to Borrower under the new or increasing Lender's Committed Warehouse Note. The new or increasing Lender shall be entitled to share ratably in interest accruing on the balances purchased, at the rates provided herein for such balances, from and after the date of such payment. All new Borrowings occurring after an increase of the total Commitments shall be funded in accordance with each Lender's revised Commitment Percentage.

(e) Section 2.4 of the Loan Agreement is hereby amended to add the following subsection (e) at the end thereof:

(e) Construction/Lot Fee. Borrower shall pay to the Agent, for -------------------- the ratable benefit of Lenders, a fee equal to 0.5% per annum of the average outstanding balance of the Construction/Lot Tranches. Such fee, accrued through the end of each calendar month, shall be paid on the fifth day of the following month. The accrued amount of such fee shall also be payable on the Termination Date. Such fee shall be computed on the basis of the actual number of days elapsed and a year of 360 days.

(f) Sections 2.11(b) and (c) of the Loan Agreement are hereby amended in their entirety to read as follows:

(b) Balance Funded Rate Segment. A Balance Funded Rate Segment --------------------------- consisting of any portion of a Construction/Lot Loan Tranche shall bear interest at the rate of 1.25% per annum. A Balance Funded Rate Segment consisting of any portion of a Gestation Loan Tranche shall bear interest at the rate of 0.65% per annum. A Balance Funded Rate Segment consisting of any portion of a Regular Tranche shall bear interest at the rate of 1.25% per annum.

(c) LIBOR Segments. A LIBOR Segment consisting of any portion of -------------- a Construction/Lot Loan Tranche shall bear interest at a rate per annum equal to the sum of LIBOR plus 1.25% per annum. A LIBOR Segment consisting of any portion of a Gestation Loan Tranche shall bear interest at a rate per annum equal to the sum of LIBOR plus 0.65% per




annum. A LIBOR Segment consisting of any portion of a Regular Tranche shall bear interest at a rate per annum equal to the sum of LIBOR plus 1.25% per annum.

(g) Section 6.1(b), 6.1(d) and 6.1(e) of the Loan Agreement are hereby amended in their entirety to read as follows:

(b) Promptly after becoming available, and in any event within 45 days after the end of each March, June, September and December, and 30 days

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after the end of each other month, a consolidated balance sheet of Borrower and its Subsidiaries, if any, as of the end of such month and the related consolidated statements of income, stockholders' equity and cash flows of Borrower and its Subsidiaries, if any, for such month and the period from the beginning of the current fiscal year of Borrower through the end of such month, (i) certified by the president of the Borrower or the chief financial officer of Parent to have been prepared in accordance with GAAP applied on a basis consistent with prior periods, subject to normal year-end adjustments, and (ii) accompanied by a completed Officer's Certificate in the form of Exhibit I hereto, executed by the president of the Borrower or the chief financial officer of Parent;

(d) [INTENTIONALLY OMITTED];

(e) Promptly and in any event within 30 days after the end of each month, management report regarding Borrower's commitment position, pipeline position and production;

(h) Section 6.22 of the Loan Agreement is hereby amended in its entirety to read as follows:

6.22 Senior Management. If William Inman or Paul Saville shall ----------------- cease to hold his current senior management position, unless the same results from unsolicited resignation, death, disability, unsolicited retirement or termination for cause, the Borrower shall promptly thereafter undertake a search for a replacement officer with comparable ability, as determined in good faith by the Borrower's Board of Directors, and shall complete such search within a reasonable period of time, and during such period of time the Borrower shall continue to conduct its business in accordance with customary industry standards.

(i) Section 7.9 and 7.10 of the Loan Agreement are hereby amended in their entirety to read as follows:

7.9 Adjusted Tangible Net Worth. Adjusted Tangible Net Worth at --------------------------- any date shall not be less than $8,000,000.

7.10 Liabilities to Adjusted Tangible Net Worth Ratios. The ------------------------------------------------- ratio of (a) the Total Liabilities, excluding the Borrower's (i) net deferred taxes, (ii) Advances to the extent of the aggregate Collateral Value of all Eligible Gestation Mortgage Loans, and (iii) obligations in respect of Repurchase Agreements, to (b) Adjusted Tangible Net Worth, shall not at any time exceed 12.5 to 1.0.

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(j) Section 8.1(m) of the Loan Agreement is hereby amended in its entirety to read as follows:

(m) [INTENTIONALLY OMITTED];




(k) Schedule 1.1(a) to the Loan Agreement is hereby amended in its entirety to read as set forth on Schedule 1.1(a) hereto.

(l) Schedule 1.1(b) to the Loan Agreement is hereby amended to add the Pennsylvania Housing Finance Agency as an Investor.

(m) Schedule 5.22 to the Loan Agreement is hereby amended to add the following:

14. Payment of intercompany advances made by the Parent to the Company from time to time under the Subordinated Demand Revolving Note of the Company dated September 7, 1999.

3. Amendment to Pledge and Security Agreement. The Pledge and Security ------------------------------------------Agreement is hereby amended as follows:

(a) A new Section 4.08, which reads as follows, is added to the Pledge and Security Agreement after Section 4.07:

4.08 REO. If an Investment Mortgage Loan is foreclosed, the --- resulting REO will remain an Eligible Mortgage Loan if the following documents are delivered to the Agent:

(a) if the purchaser at foreclosure is the Borrower and a redemption period is applicable to the sale:

(i) a certified copy of the certificate of sale;

(ii) an assignment of the certificate of sale from the Borrower, in blank; and

(iii) a copy of a recent appraisal (i.e., not more than 60 days old) of the REO.

(b) if the purchaser at foreclosure is the Borrower and either no redemption period is applicable to the sale or such redemption period has expired:

(i) a certified copy of the deed conveying the REO to the Borrower;

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(ii) a deed conveying the REO, executed in blank by the Borrower;

(iii) an original owner's title insurance policy showing the Borrower as owner, subject only to such exceptions as may be acceptable to the Agent;

(iv) a copy of a recent appraisal (i.e., not more than 60 days old) of the REO; and

(v) if requested by the Agent, a Mortgage on the REO in favor of the Agent, executed by the Borrower.

4. Exiting Lenders. On the Effective Date, the aggregate unpaid principal ---------------amount of the Loans made by The Bank of New York and Chase Bank of Texas, N.A.(the "Exiting Lenders") under the Loan Agreement and related Note, together withall interest, fees and other amounts, if any, payable to each Exiting Lenderthereunder as of the Effective Date (the "Payoff Amount"), shall be repaid infull from the proceeds of Loans made by the remaining Lenders, and theCommitments of the Exiting Lenders under the Loan Agreement shall terminate. TheAgent shall distribute to the Exiting Lenders by not later than 3:00 P.M.(Minneapolis time) on the Effective Date out of the proceeds of the Loans madefor such purpose the amount required to pay each Exiting Lender's Payoff Amountin full, whereupon such Exiting Lender shall no longer be a party to the Loan




Agreement other than in respect of rights relating to indemnities and similarrights (including, without limitation, pursuant to Sections 2.10(a), 2.10(b) and10.1 of the Loan Agreement) for events occurring or matters relating to theperiod prior to the Effective Date.

5. New Lender. On the Effective Date, Comerica Bank ("Comerica") shall be ----------a Lender under the Loan Agreement and shall have all of the rights, privilegesand benefits of a Lender under the Loan Agreement and the Loan Documents, andshall have all of the duties of a Lender thereunder, as if Comerica hadinitially been a party to the Loan Agreement as a Lender. Comerica shall makeAdvances on the Effective Date, as requested by the Agent, so that itsoutstanding Advances of each Tranche and Segment are equal to its CommitmentPercentage of such Advances outstanding on the Effective Date.

6. Conditions to Effectiveness of this Amendment. This Amendment shall ---------------------------------------------become effective on September 1, 2000 (the "Effective Date"), provided the Agentshall have received at least eight (8) counterparts of this Amendment, dulyexecuted by the Borrower and all of the Lenders (including the Existing Lendersand Comerica), and the following conditions are satisfied:

(a) Before and after giving effect to this Amendment, the representations and warranties of the Borrower in Section 5 of the Loan Agreement and Section 5 of the

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Pledge and Security Agreement shall be true and correct as though made on the date hereof, except to the extent such representations and warranties by their terms are made as of a specific date and except for changes that are permitted by the terms of the Loan Agreement.

(b) Before and after giving effect to this Amendment, no Event of Default and no Default shall have occurred and be continuing.

(c) Except as disclosed in the Parent's quarterly report on form 10-Q filed with the Securities and Exchange Commission for the fiscal quarter ended March 31, 2000, no material adverse change in the business, assets, financial condition or prospects of the Borrower shall have occurred since December 31, 1999.

(d) The Agent shall have received the following, each duly executed or certified, as the case may be, and dated as of the date of delivery thereof::

(i) a new Committed Warehousing Promissory Note payable to each Lender holding a Commitment from and after the Effective Date, in the amount of such Lender's respective Commitment Amount after giving effect to this Amendment (each, a "New Note"), duly executed by the Company;

(ii) copy of resolutions of the Board of Directors of the Borrower, certified by its respective Secretary or Assistant Secretary, authorizing or ratifying the execution, delivery and performance of this Amendment;

(iii) a certified copy of any amendment or restatement of the Articles of Incorporation or the By-laws of the Borrower made or entered following the date of the most recent certified copies thereof furnished to the Lenders;

(iv) certified copies of all documents evidencing any necessary corporate action, consent or governmental or regulatory approval (if any) with respect to this Amendment;

(v) a certificate of good standing for the Borrower in the jurisdiction of its incorporation, certified by the appropriate governmental official as of a date not more than 10 days prior to the Effective Date; and




(vi) such other documents, instruments and approvals as the Agent may reasonably request.

7. Acknowledgments. The Borrower and each Lender acknowledges that, as ---------------amended hereby, the Loan Agreement and the Pledge and Security Agreement eachremains in full force and effect with respect to the Borrower and the Lenders,and that each reference to the Loan Agreement, the Pledge and Security Agreementor the Notes in the Loan Documents shall refer to the Loan Agreement or the Pledge and Security Agreement, as amended hereby, or the New Notes. The Borrower confirms and acknowledges that it willcontinue to comply with the covenants set out in the Loan Agreement and the other Loan Documents, as amended hereby, and that its representations and warranties set out in the Loan Agreement and the other Loan Documents, as amended hereby, are true and correct as of the date of this Amendment, except to the extent such representations and warranties by their terms are made as of a specific date and except for changes that are permitted by the terms of the Loan Agreement. The Borrower represents and warrants that (i) the execution, delivery and performance of this Amendment is within its corporate powers and has been duly authorized by all necessary corporate action; (ii) this Amendment has been duly executed and delivered by the Borrower and constitutes the legal, valid andbinding obligation of the Borrower, enforceable against the Borrower in accordance with its terms (subject to limitations as to enforceability which might result from bankruptcy, insolvency, or other similar laws affecting creditors' rights generally and general principles of equity) and (iii) noEvents of Default or Default exist.

8. General. -------

(a) The Borrower agrees to reimburse the Agent upon demand for all reasonable expenses (including reasonable attorneys fees and legal expenses) incurred by the Agent in the preparation, negotiation and execution of this Amendment and any other document required to be furnished herewith, and to pay and save the Lenders harmless from all liability for any stamp or other taxes which may be payable with respect to the execution or delivery of this Amendment, which obligations of the Borrower shall survive any termination of the Loan Agreement.

(b) This Amendment may be executed in as many counterparts as may be deemed necessary or convenient, and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed an original but all such counterparts shall constitute but one and the same instrument.

(c) Any provision of this Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining portions hereof or affecting the validity or enforceability of such provisions in any other jurisdiction.

(d) This Amendment shall be governed by, and construed in accordance with, the internal law, and not the law of conflicts, of the State of Minnesota, but giving effect to federal laws applicable to national banks.

(e) This Amendment shall be binding upon the Borrower, the Lenders, the Agent and their respective successors and assigns, and shall inure to the benefit of the Borrower, the Lenders, the Agent and the successors and assigns of the Lenders and the Agent.

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[This page is intentionally left blank]

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IN WITNESS WHEREOF, the parties hereto have caused this Amendment tobe executed as of the day and year first above written.

NVR MORTGAGE FINANCE, INC.

By: _________________________




Its: _________________________

U.S. BANK NATIONAL ASSOCIATION, as Agent and Lender

By: _________________________ Its: _________________________

SCHEDULE 1.1(a) ---------------

================================================================================ CommitmentLender Amount- -------------------------------------------------------------------------------- U.S. Bank National Association $ 45,000,000Mortgage Banking ServicesU.S. Bank Place601 Second Avenue SouthMinneapolis, Minnesota 55402-4302Attention: Kathleen ConnorTelephone: 612-973-0306Telecopy: 612-973-0826- --------------------------------------------------------------------------------Guaranty Federal Bank,F.S.B. $ 20,000,0008333 Douglas, 11/th/ FloorDallas, TX 75225Attention: Mike BarberTelephone: 214-360-2872Telecopy: 214-360-1660- --------------------------------------------------------------------------------Fleet Bank, N.A. $ 10,000,000115 Perimeter PlaceSuite 500Atlanta, GA 30346Attention: Steven S. SelboTelephone: 770-390-6522Telecopy: 770-390-9811- -------------------------------------------------------------------------------- Comerica Bank $ 15,000,000Comerica Tower at Detroit Center500 Woodward AvenueDetroit, MI 48226Attention: Heather D. HogleTelephone: 313-222-5740Telecopy: 313-222-9295- -------------------------------------------------------------------------------- National City Bank of Kentucky $ 10,000,000421 W. Market StreetLouisville, KY 40202Attention: Mary Jo ReissTelephone: 502-581-4197Telecopy: 502-581-4154- -------------------------------------------------------------------------------- TOTAL $100,000,000================================================================================


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EXHIBIT 10.37




NVR, INC. 7601 Lewinsville Road McLean, Virginia 22102

Dated as of: December 13, 2000

Fleet National BankIndividually and as Agent100 Federal StreetBoston, Massachusetts 02110

Comerica BankComerica Tower500 Woodward Avenue, 7/th/ FloorMC 3256Detroit, Michigan 48226

U.S. Bank National Association601 Second Avenue, SouthMinneapolis, Minnesota 55402

Re: Amendment No. 4 to Third Amended and Restated Credit Agreement --------------------------------------------------------------

Ladies and Gentlemen:

We refer to the Third Amended and Restated Credit Agreement, dated asof September 30, 1998 (as amended, the "Credit Agreement"), by and among NVR,Inc. (the "Borrower"), Fleet National Bank, successor by merger to BankBoston,N.A. ("Fleet"), U.S. Bank National Association ("USB") and Comerica Bank("Comerica") (collectively, the "Banks"), and Fleet as Agent for the Banks (the"Agent"). Terms used in this letter of agreement (this "Amendment No. 4") whichare not defined herein, but which are defined in the Credit Agreement, shallhave the same respective meanings herein as therein.

We have requested you to make modifications to the Credit Agreement(collectively, the "Modifications"). We have also requested you to consent tothe merger of Fox Ridge with and into the Borrower. You have advised us thatyou are prepared and would be pleased to make the Modifications and give yourconsent to such merger on the condition that we join with you in this AmendmentNo. 4.

Accordingly, in consideration of these premises, the promises, mutualcovenants and agreements contained in this Amendment No. 4, and fully intendingto be legally bound by this Amendment No. 4, we hereby agree with you asfollows:

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ARTICLE I ---------

AMENDMENTS TO CREDIT AGREEMENT ------------------------------

Effective as of the consummation of the Merger (defined below), the CreditAgreement is amended as follows:

(a) The terms "Loan Documents" and "Credit Agreement" shall, wherever usedin the Credit Agreement or any of the other Loan Documents, including, withoutlimitation, each Revolving Credit Note, be deemed to also mean and include thisAmendment No. 4.

(b) The definition of "Borrowing Base" contained in Section 1 of theCredit Agreement is hereby amended to read in its entirety as follows:

"Borrowing Base". At any time of determination, an amount equal to




-------------- the sum of the following assets of Borrower (excluding NVRMF): (i) the book value of Sold Units which are not held as Beneficial Interest Units multiplied by ninety-five percent (95%); plus (ii) the book value of Unsold Units which are not held as Beneficial Interest Units multiplied by eighty percent (80%); plus (iii) the book value of Manufacturing Materials multiplied by eighty percent (80%); plus (iv) up to an aggregate of $10,000,000, the sum of (a) the book value of Sold Units which are held as Beneficial Interest Units multiplied by ninety-five percent (95%) and (b) the book value of Unsold Units which are held as Beneficial Interest Units multiplied by eighty percent (80%); in each case, as calculated in accordance with GAAP."

(c) The definition of "Restricted Subsidiaries" contained in Section 1 ofthe Credit Agreement is hereby amended to read in its entirety as follows:

"Restricted Subsidiaries". The following entities: NVR Delaware, NVR ----------------------- Funding, NVR Funding II and NVR Services and such other entities as may be designated as a Restricted Subsidiary under the terms of the New Indenture and which comply with the provisions of Section 9.36.

(d) The last sentence of the definition of "Sold Units" contained inSection 1 of the Credit Agreement is hereby deleted in its entirety.

(e) The following new definition is added to Section 1 of the CreditAgreement as follows:

"Merger". The merger of Fox Ridge with and into the Borrower on the ------ terms and conditions set forth in the agreement of merger dated as of December 31, 2000, as evidenced by a certificate of merger accepted by the applicable filing office and provided to the Agent.

(f) Section 9.4 of the Credit Agreement is hereby amended to read in itsentirety as follows:

"9.4 Use of Proceeds; Letters of Credit. Borrower shall use the ---------------------------------- proceeds of the Advances of the Revolving Credit Loans solely to provide for the working capital needs of Borrower and to meet such other capital needs of Borrower as are

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provided for under this Agreement and to make Investments and Distributions to the extent expressly permitted under this Agreement."

(g) The parenthetical contained in Section 9.21(i) of the Credit Agreementis amended to read in its entirety as follows:

"(other than NVRMF and its Subsidiaries, NVR Funding, NVR Funding II and NVR Services)".

(h) Section 9.21(o) of the Credit Agreement is hereby deleted in itsentirety and replaced by the following new Section 9.21(o):

"(o) provided no Default or Event of Default has occurred and remains uncured, Investments in NVRMF and NVR Funding to the extent set forth below:

(i) in NVRMF, Investments (the "Permitted Maximum NVRMF Investment") from time to time outstanding, in an amount up to (a) $30,000,000 or (b) if no amounts of the Loans are Outstanding, up to (1) the amount then allowed under the New Indenture if any of the 1998 Senior Notes are outstanding or (2) if the 1998 Senior Notes are not outstanding, $50,000,000; and

(ii) in NVR Funding, Investments intended and utilized solely for the benefit of NVRMF, up to the Permitted Maximum NVRMF




Investment amount (less any then outstanding amounts of Investments in NVRMF made by Borrower under clause (i) above or by NVR Funding under this clause (ii));".

(i) Section 9.26(a) of the Credit Agreement is hereby deleted in itsentirety and replaced by the following new Section 9.26(a):

"(a) Borrower shall not enter into or permit any Restricted Subsidiary to enter into any sale and leaseback transactions as seller-lessee or make any acquisitions without the prior written consent of the Majority Banks and the Agent other than (i) the sale and leaseback of model units in the ordinary course of Borrower's business consistent with past practices or as may be provided for in this Agreement; (ii) acquisitions of real estate to the extent permitted by this Agreement; (iii) capital expenditures; (iv) building materials, fixtures, supplies and all other personal property acquired by Borrower in the ordinary course of business consistent with past practices; (v) Investments and Distributions permitted pursuant to (S)(S)9.20 and 9.21; and (vi) other acquisitions in the aggregate amount of $5,000,000 during the term hereof."

(j) Section 9.26(b) of the Credit Agreement is hereby deleted in itsentirety.

(k) Section 10.1(c) of the Credit Agreement is hereby amended by deletingthe reference to "(S)9.26(b)" therefrom.

(l) Schedule 6.1(c) to the Credit Agreement is hereby amended to read inits entirety as set forth on Annex 1 attached hereto. -------

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ARTICLE II ----------

CONSENT TO FOX RIDGE MERGER ---------------------------

We have informed you that we intend to merge Fox Ridge with and into theBorrower. Pursuant to Section 9.24 of the Credit Agreement, the Borrower isprohibited from merging or consolidating with or into any Person and isprohibited from allowing any Restricted Subsidiary to merge or consolidate withor into any Person. By your signatures below, please evidence your consent tothe merger of Fox Ridge with and into the Borrower on the terms set forth in theagreement of merger dated as of December 31, 2000, a copy of which has beenprovided to the Agent.

ARTICLE III -----------

CONDITIONS PRECEDENT TO AMENDMENT ---------------------------------

The Banks' agreement herein to amend the Credit Agreement and consent tothe merger of Fox Ridge with and into the Borrower is subject to the fulfillmentof the following conditions:

(a) The Agent shall have received from the Borrower this Amendment No. 4, duly executed and delivered by the Borrower; and

(b) the Agent and each of the Banks shall have executed this Amendment No. 4.

The parties hereto acknowledge and agree that in the event that the Mergeris not consummated on December 31, 2000, this Amendment No. 4 shall be of nofurther force or effect and the modifications to the Credit Agreement describedherein shall not become effective.




ARTICLE IV ----------

REPRESENTATIONS AND WARRANTIES ------------------------------

The Borrower hereby represents, warrants and covenants to you as follows:

(a) Representations in Credit Agreement. To the best of the Borrower's -----------------------------------knowledge, each of the representations and warranties made by or on behalf ofthe Borrower to you in the Credit Agreement and the other Loan Documents, asamended through this Amendment No. 4, was true and correct when made, and istrue and correct in all material respects on and as of the date hereof with thesame full force and effect as if each of such representations and warranties hadbeen made by the Borrower on the date hereof and in this Amendment No. 4, exceptto the extent that such representations and warranties relate solely to a priordate.

(b) No Events of Default. No Default or Event of Default exists on the --------------------date hereof (after giving effect to the Modifications contemplated hereby andthe transactions described herein).

(c) Binding Effect of Documents. This Amendment No. 4 has been duly ---------------------------executed

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and delivered to you by the Borrower and is in full force and effect as of thedate hereof, and the agreements and obligations of the Borrower contained hereinconstitute legal, valid and binding obligations of the Borrower enforceableagainst the Borrower in accordance with their respective terms.

(d) Consents. The Borrower has obtained all consents which are necessary --------in order to consummate the transactions referred to in this Amendment No. 4, andhas furnished copies of all such consents, if any, to the Agent.

ARTICLE V ---------

PROVISIONS OF GENERAL APPLICATION ---------------------------------

(a) No Other Changes. Except as otherwise expressly provided by this ----------------Amendment No. 4, all of the terms, conditions and provisions of the CreditAgreement and the other Loan Documents remain unaltered. The Credit Agreementand this Amendment No. 4 shall be read and construed as one agreement.

(b) Governing Law. This Amendment No. 4 is intended to take effect as a -------------sealed instrument and shall be deemed to be a contract under the laws of theCommonwealth of Massachusetts. This Amendment No. 4 and the rights andobligations of each of the parties hereto shall be governed by and interpretedand determined in accordance with the laws of the Commonwealth of Massachusetts.

(c) Binding Effect; Assignment. This Amendment No. 4 shall be binding --------------------------upon and inure to the benefit of each of the parties hereto and their respectivesuccessors in title and assigns.

(d) Counterparts. This Amendment No. 4 may be executed in any number of ------------counterparts, but all such counterparts shall together constitute but one andthe same agreement. In making proof of this Amendment No. 4, it shall not be




necessary to produce or account for more than one counterpart hereof signed byeach of the parties hereto.

(e) Conflict with Other Agreements. If any of the terms of this Amendment ------------------------------No. 4 shall conflict in any respect with any of the terms of the CreditAgreement or any other Loan Document, the terms of this Amendment No. 4 shall becontrolling.

If you are in agreement with the foregoing, please sign the form ofacceptance on the enclosed counterpart of this Amendment No. 4 and return suchcounterpart to the undersigned, whereupon this Amendment No. 4 shall become abinding agreement between you and the undersigned.

Very truly yours,

NVR, INC.

By:___________________________________ Title:

[Signatures continued on next page]

5<PAGE>

The foregoing Amendment No. 4 is hereby accepted by the undersigned as ofDecember 13, 2000.

FLEET NATIONAL BANK, Individually and as Agent

By:_____________________________ Title:

COMERICA BANK

By:_____________________________ Title:

U.S. BANK NATIONAL ASSOCIATION

By:_____________________________ Title:

6<PAGE>

ANNEX 1 -------

Schedule 6.1(c) ---------------

Subsidiaries of NVR, Inc.

1. NV Insurance Brokers, Inc.

2. Dillon Company, Inc.

3. NVR Mortgage Finance, Inc. and its subsidiaries listed below:

. Service Tax Corporation . Ryan Mortgage Acceptance Corporation IV . MPS Mortgage Appraisal Services, Inc. . Richmarr Mortgage Corp. . NVR Nevada Mortgage Servicing, Inc. . Heritage Mortgage LP . NVRM Acquisition, Inc. and its subsidiary First Republic Mortgage




Corp. . NVR Settlement Services, Inc. and its subsidiaries listed below:

. NVR Settlement Services of Tennessee LLC . NVR Settlement Services of Maryland, Inc. . PHM Title Agency LLC . Cornerstone Settlement Services, L.P. . Heritage Settlement Services, L.P. . First NVR Settlement Services LLC . NVR Title Agency LLC . McMurray Settlement Services, L.P. . Legacy Title Agency, Inc.

4. RVN, Inc.

5. NVRD Holding, Inc. and its subsidiary:

. NVR Development, Inc. and its subsidiaries listed below:

. NVRD California, Inc. . NV California, Inc. . Old Stage Limited Partnership . Centre Ridge II Limited Partnership . Centre Ridge III Limited Partnership . Seven Courts Development General Partnership . NVRD HGDS Associates G.P. . H.R. Remington Properties L.P. . Remington/Carlsbad L.P.

6. NVHL, Inc.

7. Madison Lane G.P.

1<PAGE>

8 M/R Limited Partnership

9. 100 Investment L.P.

10. Land First

11. NVR Services, Inc.

12. NVR Funding II, Inc.

13. HBG/NVR LLC

2</TEXT></DOCUMENT><DOCUMENT><TYPE>EX-11<SEQUENCE>7<FILENAME>0007.txt<DESCRIPTION>EXHIBIT 11<TEXT>

<PAGE>

EXHIBIT 11

NVR, Inc. Computation of Earnings Per Share (amounts in thousands, except per Share amounts)

<TABLE><CAPTION> Year Ended Year Ended Year Ended December 31, 2000 December 31, 1999 December 31, 1998 ----------------- ----------------- -----------------




<S> <C> <C> <C>1. Net income $ 158,246 $ 108,881 $ 56,706 ================= ================= =================

2. Average number of Shares outstanding 9,084 10,190 11,131

3. Shares issuable upon exercise of dilutive options, warrants and subscriptions outstanding during period, based on average market price 1,480 1,898 2,169 ----------------- ----------------- -----------------

4. Average number of Shares and Share equivalents outstanding (2 + 3) 10,564 12,088 13,300 ================= ================= =================

5. Basic earnings per share (1/2) $ 17.42 $ 10.69 $ 5.10 ================= ================= =================

6. Diluted earnings per share (1/4) $ 14.98 $ 9.01 $ 4.26 ================= ================= =================</TABLE>


<PAGE>

EXHIBIT 21 NVR, Inc. Subsidiaries

State of -------- Incorporation or ----------------Name of Subsidiary Organization- --------------------------------------- ------------

NVR Mortgage Finance, Inc. VirginiaNVR Settlement Services, Inc. PennsylvaniaRyan Mortgage Acceptance Corporation IV DelawareRVN, Inc. DelawareNVR Services, Inc. VirginiaNVR Funding II, Inc. Delaware


<PAGE>

Consent of Independent Auditors -------------------------------

The Board of DirectorsNVR, Inc.:




We consent to incorporation by reference in the registration statement (No. 33-69754) on Form S-8 (for the NVR, Inc. Directors' Long-Term Incentive Plan), theregistration statement (No. 33-69756) on Form S-8 (for the NVR, Inc. ManagementEquity Incentive Plan), the registration statement (No. 33-69758) on Form S-8(for the NVR, Inc. Equity Purchase Plan), the registration statement (No. 33-87478) on Form S-8 (for the NVR, Inc. 1994 Management Equity Incentive Plan),the registration statement (No. 333-04975) on Form S-8 (for the NVR, Inc.Management Long-Term Stock Option Plan), the registration statement (No. 333-04989) on Form S-8 (for the NVR, Inc. Directors' Long-Term Stock Option Plan),the registration statement (No. 33-69436) on Form S-3, the registrationstatement (No. 333-44515) on Form S-3 (for a universal shelf registration forsenior or subordinated debt in an amount up to $400 million), the amendedregistration statement (No. 333-44515) on Form S-3A (for a universal shelfregistration for senior or subordinated debt in an amount up to $400 million),the registration statement (No. 333-79949) on Form S-8 (for the NVR, Inc. 1998Directors' Long-Term Stock Option Plan), and the registration statement (No.333-79951) on Form S-8 (for the NVR, Inc. 1998 Management Stock Option Plan) ofour reports on the consolidated balance sheets of NVR, Inc. and subsidiaries asof December 31, 2000 and 1999 and the related consolidated statements of income,shareholders' equity and cash flows for each of the years in the three yearperiod ended December 31, 2000, included herein.

KPMG LLP

McLean, VirginiaMarch 7, 2001

